Preparing your taxes can be a difficult undertaking, whether
you use tax-preparation computer software, fill out the
forms yourself, or hire us. Regardless of your preferred
method, keep these tax tips in mind before you sign your return
and mail it to Uncle Sammy.
Income and Adjustment Items
Itemized Deduction Items
Tax Credits and Other Items
Last Minute Tax Ideas
Income
and Adjustment Items
1. File if you should:
You, or your children, or even your elderly parents might
not technically be required to file a tax return, but if you
worked for wages and/or had federal taxes withheld, the only
way you can recover those federal taxes is to file a return
and claim a refund. For more information, see IRS Publication
4 (Student's Tax Guide) and IRS Publication 554 (Older Americans'
Tax Guide).
2. Use the "Qualifying
Widow/Widower" filing status:
If your spouse passed away last year, you are still considered
married for the whole year in terms of your filing status. If
you have at least one dependent child in your household and
have not remarried, you could be entitled to claim a special
filing status for the next two years after the death of
your spouse. This special filing status will save you tax dollars.
Specifics can be found in the Filing Status chapter of IRS Publication 501.
3. Use the "Head
of Household" filing status when your ex-spouse claims
the child as a deduction:
You might have negotiated the dependent exemptions available
to your ex-spouse during the divorce (usually allowed when the
ex makes timely child support payments). Nevertheless, you can
still use the Head of Household filing status if the children
actually reside with you and you have physical custody of them.
4. Don't report too much
wage income:
If you participate in a deferred-compensation plan at your
place of employment -- 401(k), 403(b), etc. -- remember to report
as wages only the amount reported to you in Box 1 of your W-2
form. Don't report the salary that you actually earned.
5. Don't report interest
earned on Series E, EE, or Treasury bonds/bills/notes on your
state tax return:
While this interest is taxable for federal purposes, it
is not taxable for state purposes. Remember to make the appropriate
adjustment on your state tax return.
6. Segregate your mutual
fund capital gains distributions from your regular distributions:
Remember that long-term capital gains receive a special
lower tax treatment. Also note that there is a brand-new
section on the Form 1099-DIV that you received from your mutual
fund company: Qualified 5-Year Capital Gains. These gains
may be taxed using the "superlong-term" capital gain
rates, so make sure that you compute those gains correctly. When
you report your mutual fund dividends on Schedule B, pay particular
attention to your capital gains distributions as reported to
you on your mutual fund statement. Make sure to take any capital
gains dividends (including qualified five-year gains) and report
them directly on Schedule D. Don't report your capital gain
dividends on Schedule B and pay ordinary tax rates on capital
gain income.
7. Add your broker commissions
and other fees to the cost of your stock:
When you buy stock, you'll pay broker commissions. You might
also pay transfer fees. These expenses are added to the purchase
price of the stock, and remain with the stock until sold. When
you sell the shares, make sure to reduce your gross sales price
by the amount of these expenses. And don't forget to reconcile
your sales to the Form 1099B that was provided to you by your broker.
8. Maximize your IRA
contributions:
Did you know that alimony received is considered "earned
income" for IRA contribution purposes? Did you also know
that even if your spouse is a homemaker with no W-2 earned income,
you might still be able to make a full $2,000 IRA contribution
for him/her in 2001? (These contributions may or may not be
deductible, depending on your individual circumstances. Also
note that annual IRA contribution limits increase to $3,000
for 2009.) If you made Roth IRA contributions or conversions,
be sure to keep track of them. It will be very important if
you find that you ever have to take an "early" distribution
from your Roth IRA. IRS Publication 590 covers all forms of
IRAs.
9. Adjustment for student
loan interest:
Did you pay interest on a student loan this year? If so,
you might be able to reduce your income by the amount of the
interest that you paid, to a maximum adjustment of $2,500. For
tax year 2001, the interest must be paid in the first 60 months
of the loan, and the loan must have been used for qualified
education expenses. But in tax year 2009, the 60-month
rule has been lifted and your interest may qualify for the deduction
regardless of how long you've been paying on your loans. The
beauty of this is that you do not have to itemize your deduction
on Schedule A to claim the adjustment for student loan interest
paid. For more information, read the instructions for Line 24
of Form 1040 for 2001. See Interest Tax Deduction for School
Loans for more information.
If you have questions or concerns regarding any aspect of your
tax preparing, please email
us or give us a call at 408-267-1003
to set up an appointment.
Itemized Deduction Items
10. Property tax deduction
for second homes and/or investment property:
Many people are under the impression that property tax deductions
are available only for your primary residence. Not true. Property
taxes are deductible for all applicable real property -- third
or fourth homes, vacant lots, raw land, etc. But -- and
this is a very big but -- if you have rental properties,
different rules apply.
11. Investment interest:
Did you pay a little (or a lot) of interest to your broker
on your margin account? Did you pay some interest to a finance
company to buy that raw land investment property? If so, you
may be the proud owner of deductible investment interest. The
rules can get pretty complicated, so make sure to check out
IRS Form 4952 and instructions. Confused? See Investment
Interest and Margin Interest for clarification.
12. Refinance points:
Did you refinance your primary or secondary residence? If
so, you might have paid loan "points." You might be
able to amortize those points over the life of the loan and
generate an additional interest deduction. For additional information,
check out the instructions for Schedule A in your Form 1040
Forms and Instructions booklet. (Looking to refinance while
rates are still low? We can help.)
13. Charitable travel:
Do you use your auto for charitable purposes? If so, you
can deduct 14 cents per mile for all qualified charitable travel.
Not only that, you can deduct your out-of-pocket expenses when
you are serving a qualified organization (for example, Scout
leaders can deduct the cost of uniforms). But what you
can't deduct is the value of your time that you might donate
to a charitable cause.
14. Non-cash charitable
contributions:
Did you give that old couch to Goodwill Industries? Or how
about those clothing items to the Salvation Army? Don't forget
to get receipts and deduct the fair market value of those items
as a charitable contribution. Not sure how to place a value
on the stuff? Check out www.taxsave.com. For a fee, you can
buy a list of prices for these goods. Since most people
underestimate the value of the goods, you might be able to recover
the cost of the listing in the form of reduced taxes. For additional
information, check out IRS Form 8283 and instructions.
15. Investment expenses:
Many investment expenses (such as legal and professional
fees, fees for investment advice, fees for tax preparation/advice,
investment and/or tax books, magazines, subscriptions, safe
deposit box fees, IRA custodial fees, certain investment travel
expenses, and certain investment entertainment expenses) can
be deducted as a miscellaneous itemized deduction on Schedule
A. For additional information regarding investment expenses,
see IRS Publication 550.
Tax Credits and Other Items
16. Child and dependent
care credit:
Mom and Dad both work and had to pay somebody to watch Junior
during work hours? Well, if Junior is under age 13, Mom and
Dad could qualify for the dependent care credit. How about if
Mom works but Dad is a full-time student with no earned income?
The dependent care credit could still be available. Don't forget
about a spouse who is disabled and can't care for him/herself.
Even if there are no children involved, the dependent care credit
might still be available. For additional information, check
out IRS Form 2441 and instructions (for Form 1040) or Schedule
2 (for Form 1040A). Also, see IRS Publication 503 for details
on Child and Dependent Care Expenses and IRS Publication 903
for information on tax credits of interest to people with disabilities
and their caregivers.
17. Leave the rebate
alone:
Remember that tax "rebate" that you received last
fall? Well, the IRS has reported that millions of
people are either trying to claim the rebate again, or trying
to pay taxes on it, or otherwise muddling their return with
incorrect information. Don't do it! If you received the rebate
that you were entitled to, simply ignore line 47 on the 2001
tax return. There is nothing else that you need to do. Now,
if you received less than you should have received in the
form of a rebate, then line 47 is your new best friend. Read
and understand the rules applicable to this line on the tax
return before you tackle it. More? See New Rate Cuts and Rebates.
18. Foreign tax credit:
Do you have mutual funds that invest in foreign stock? Or
do you own individual stocks in overseas companies? If so, you
probably are charged a "foreign tax" on the dividends
that you receive. Not sure how to report those foreign taxes?
You can certainly take them as an itemized deduction. For
those of you who don't itemize or find it more valuable to take
the credit, you can do so right on your Form 1040. While you
no longer have to file IRS Form 1116 if you meet certain criteria,
check it out anyway because the form and instructions provide
valuable details on how to include the credit on your Form 1040. See
if you qualify by reading The Foreign Tax Credit.
19. Education Credits:
Did you know that you can claim a credit for qualified education
expenses paid for yourself, your spouse, and your dependents?
It's true. You can even claim credits for your child's college
education. The HOPE and Lifetime Learning credits can be valuable
tax busters for you. The rules can get a bit complex, and there
are certainly restrictions. But if you or anybody in your family
attends a higher education facility, it's something that you
should take a closer look at. Review the instructions for line
44 on Form 1040 and also review IRS Publication 970 for more information.
20. Child credit:
If your dependent is under age 17 at the end of the calendar
year, you might qualify for a $600 credit when you file your
tax return for the year. Why? Just for putting up with the kid.
Really. There are no special qualifications other than the age
of the dependent and your total income (high-income taxpayers
don't receive the benefit of this credit). If you qualify, don't
forget to reduce your taxes by the full $600 for each qualifying
dependent for the 2001 tax year. Check out IRS Publication 972
for more information and qualification worksheets. This credit
is in addition to any childcare credit that you are able to
claim, so don't confuse the two since they are completely different
issues. Also be aware that this credit amount is scheduled
to gradually increase to $1,000 per child between now and 2010. Find
more good news at New Education Tax Savings Options.
A Bonus Tip:
The new tax rules ushered in not too long ago will
provide additional relief to millions of taxpayers. Don't
overlook the impact of those tax changes when you're doing your
planning for future tax years! Read more about the new changes
at How Will the Tax Cut Benefit Me? If you'd like even
more information on the issues discussed in these tax tips--
and more -- check out The Motley Fool Tax Guide 2009. Finally,
to locate an IRS form or publication, visit the IRS website.
If you have questions or concerns regarding any aspect of your
tax preparing, please email
us or give us a call at 408-267-1003
to set up an appointment.
Last Minute Tax Ideas
While the stockings may be hung by the chimney with care, have
you also taken care of your tax-reduction planning? The calendar
will soon be flipping over to January 1, so now is the time
to make those last-minute tax moves that will take a bicuspid
out of your annual tax bite. Here are a few suggestions:
Contributions to your favorite charity
If you have appreciated stock that you've held for more than
one year, you might want to keep the cash in your pocket and
donate the stock. You'll avoid paying tax on the appreciation,
but will still be able to deduct the full value of the stock.
You win, your charity wins, and the only loser is Uncle Sammy
(but he doesn't really mind... which is why this tax break has
been written into the law!).
If you still love the stock and want to maintain a position
in the shares after your charitable contribution, you can simply
buy new shares in the company. Your charity will be able to
assist you with this transaction, and it can really be a great
deal for all involved. (Looking for a worthy and fiscally responsible
charity? Check out the nominees for Foolanthropy 2001.) And
don't forget about the contributions that you will make by check!
Remember that you need to have the check written and given to
the charity (or at least mailed out) before the end of the year
in order for this deduction to "stick." It matters
not that the charity may not actually cash the check until the
next year. The key is that you deliver it to the charity before
the end of the year. Remember that this little trick has merit
only if you are planning on itemizing your deductions on Schedule
A. If you're a "standard deduction" filer, you should
still keep charity in your heart, but Uncle Sammy won't help
you out with a tax deduction.
Use your credit card
If you have year-end deductible expenses (such as business expenses,
medical expenses, charity, rental expense, miscellaneous itemized
deductions, or virtually any allowable deduction), you can use
your credit card to make the purchase this year, take the deduction
this year, and pay your credit card bill next year.
You see, when you pay with a credit card, the IRS considers
the expense deductible in the year that the charge is incurred,
not necessarily when you pay the credit card charge.
In fact, going back to the first tip, you can even find charitable
organizations that accept credit cards for charitable contributions.
If you have the right credit card, you can receive a 30-day
"float" that amounts to an interest-free use of the
bank's money if you pay it off when the bill comes.
Prepay your state and/or local taxes
If you believe that your tax bracket next year will be no higher
than this year, and you won't be bothered by any alternative
minimum tax issues, consider making those state/local tax payments
before the end of this year. After all, you're going to owe
the money anyway, right? So why not make those payments before
December 31 and take the federal tax deduction this year?
You might think that this strategy only applies to people who
have fourth-quarter estimated tax payments to make in January,
but it really doesn't. If you are a W-2 wage earner and expect
a state/local tax balance due, even you can use a state/local
prepayment voucher and make your tax payment before the end
of the year. But before you leap, make sure to take a look at
your alternative minimum tax position. If you find yourself
in the AMT zone, prepaying your state taxes will not result
in any additional deduction.
But again, remember that you will only benefit from this move
if you itemize your deductions. If you're a standard deduction
filer, prepayment of your state taxes won't get you a tax deduction.
Catch up your 401(k) contributions
As you know, there are maximum limits to 401(k) contributions
each year. Generally, your 401(k) contributions must be made
throughout the year, but did you know that some 401(k) plans
allow for "catch-up" contributions in December if
your contribution level is less than the maximum allowed? Using
your December bonus to fund the balance of your 401(k), when
allowed, might be a good way to dodge some current taxes. If
your employer matches some of your catch-up contributions, you're
in even better shape. Not all 401(k) plans allow for this provision,
so check with your company's benefits administrator.
Worthless stock
How about those stubs you own that have completely fallen off
the radar screen. Perhaps the company is in bankruptcy... or
de-listed... or worse! You might have some worthless stock on
your hands that might generate you a capital loss. But the term
"worthless" is a technical one from a tax standpoint.
It means more than just the bottom dropping out of the price
of the stock or a suspension of trading of that stock. There
are some tricks that you might be able to use to get these shares
sold before the end of the year, so you don't have to fight
over the term "worthless" with Uncle Sammy. But make
sure that you understand the rules.
Deductions and credits for non-itemizers
Just because you don't itemize your deductions doesn't mean
that there aren't deductions and credits out there for you to
use. Alimony paid, pension plan deductions (Keogh, SEP, SIMPLE,
IRA, etc.), student-loan interest, job-related moving expenses,
medical insurance for the self-employed, and deductions
for self-employment taxes are all available to you -- regardless
of whether you itemize deductions. This is true also for the
many credits available to you even if you don't itemize your
deductions. Some of the most popular credits include the Child
Tax Credit, the Hope and Lifetime Learning Credit, and the Dependent
Care Credit.
We know that you're busy this time of year, but don't let these
last-minute tax savings opportunities pass you by!
If you have questions or concerns regarding any aspect of your
tax preparing, please email
us or give us a call at 408-267-1003
to set up an appointment.
Used with permission:
20 Tax Tips By Roy Lewis (TMF Taxes)
March 22, 2009
Last Minute Tax Tips By Roy Lewis (TMF
Taxes)
December 21, 2001
www.fool.com
(The Motley Fool)
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