Itemizing deductions – Schedule A

Posted by Bruce Mc on Jan 4, 2010 in | 0 comments

Getting the Most out of Itemizing your deductions.

Itemizing deductions is an incredibly easy theory to understand, yet the strategies behind it all can be intricate and countless.

Free Quicken Online automatically categorizes your expenses.

The rule for when to itemize is simple = you do it if the total of your itemized deductions is greater than your standard deduction.

First of all, your tax is based on your “taxable income.” That’s your total income after you’ve subtracted above-the-line deductions like your Individual Retirement Account (IRA) or other qualified retirement-plan contributions, moving expenses or alimony payments, plus your personal exemption and either :

Your standard deduction or, Your itemized deductions.

Your itemized deductions are sometimes referred to as “below-the-line” deductions. (“adjusted gross income” -aka AGI- is “the line.”) Clearly, the more you can deduct, the less in tax you’ll owe.

Here are the standard deductions that apply to 2011 taxes:

Some taxpayers must itemize, even if their deductions are less than the standard deduction. You must itemize your deductions if:

• You are married, filing separately, and your spouse itemizes.
• You are a U.S. citizen who can exclude income from U.S. possessions.
• You are a nonresident or dual-status alien.
• You file a short-period return because of a change in your accounting period.
  • There are eight sections  On Schedule A. Seven of which are itemized expenses that you can deduct on your taxes:

Medical and Dental expenses.

Taxes. These include state and local income taxes, property taxes on real estate, intangible taxes (on the value of stocks and bonds you own) and on personal property taxes on such things as cars. 

Interest expenses. For most people, these are limited to home mortgage interest, points (interest that’s prepaid to buy a home), and some interest on investments and education expenses. For most taxpayers, the mortgage deduction is what lets them itemize. If you take out a 30-year, $140,000 mortgage at 6%, you will generate about $8,350 in deductible interest in the first year.

Charitable contributions.

• See also my Fair Market Value Guide. (recently updated for 2010 filing)

Casualty – Theft losses

Job & Misc. Expenses

Other Misc. Deductions

Total Deductions

The key, then, is to maximize the value of your itemized deductions. Here’s where planning can put dollars in your pocket. Ask your Tax preparer a list of deductions to see What You Can Itemize.

Dealing with the floors

Some itemized deductions — including medical expenses or miscellaneous deductions such as investment expenses, safe deposit fees, professional education, employee job-hunting expenses and tax-preparation fees — are not allowed until they exceed a certain “floor” amount.

The toughest floor to exceed is medical expenses. No medical expenses are allowed as itemized deductions except for the amount that exceeds 7.5% of your adjusted gross income. That means if you have an adjusted gross income of $100,000, the first $7,500 of your medical expenses doesn’t count. But sometimes, elective medical expenses can be accelerated or even deferred. Orthodontia payments for you or your dependents can often be extended. They always can be accelerated. These expenses are deducted in the year they are paid, not necessarily in the year the service is rendered.

If you can already pass the 7.5% test for allowable expenses or these expenses would put you over the minimum hurdle, you should consider accelerating them. If you lack the cash, consider charging the expenses.

On credit card charges, you are allowed the deduction in the year of the charge, not in the year that the charge is paid off.

Don’t automatically accelerate if it puts you over the 7.5% floor. Remember, your total itemized deductions must exceed your standard deduction before you get any real additional benefit from any of them. Allowable medical expenses are just one component of the package.

If you don’t exceed the 7.5% floor or your total itemized deductions don’t exceed your standard deduction this year, you should consider deferring your payments or any elective medical procedures. You get the use of the money — and any investment returns. In any case, you may be able to use the deductions in the subsequent year when you revisit the itemization question.

Miscellaneous itemized expenses are also deductible only after they exceed a minimum floor. In this case, it’s 2% of your adjusted gross income. So, with an adjusted gross income of $100,000, your first $2,000 of miscellaneous itemized deductions won’t count.

But here again, many of these deductions can be either accelerated or deferred. Miscellaneous itemized deductions such as those mentioned above often can be paid in the year of your choice. Many of my clients send my tax-preparation fees to me on Dec. 31 in order to get the deduction in the year the check was mailed. I don’t get the income until I receive the check — in the new year.

The rule here is the same as with medical expenses. First, qualify the expenses to be included in the deductible pot. Then, only if you expect to itemize, accelerate. If not, defer.

Interest and tax payments

Some interest and tax payments can be handled in the same way.

Let’s look at the interest you are paying. Your January payment on your mortgage includes the interest you accrued for December of the previous year.

Example: By making your January 2012 payment on Dec. 31, 2011, you have accelerated a full month’s interest deduction into 2011.

In the 25% bracket for 2011 on a $1,000 interest payment, that saves you an immediate $250 on April 15, 2012. By doing that each year, you have created an interest-free loan of that $250 in perpetuity or at least until the loan is paid off.

Unfortunately, you can’t prepay two or three months in advance because the interest deduction must relate to the year the money was used. But your Dec. 31, 2011 payment will be for the use of the money during December 2011.

You can accelerate some tax payments as well. If you don’t pay your real-estate tax in your mortgage, you have the opportunity to accelerate your real-estate tax payments. I am billed in the 4^th quarter of my real-estate taxes January of the following year. But I actually make my payment on Dec. 31 of the previous year. The technique is the same with estimated state income tax payments. I make my estimated state income tax payment, due in January in December.

Any voluntary expenditure can be accelerated or deferred. Your gifts to charity are the best example. Whether your $1,000 pledge to your church or synagogue is sent on Dec. 31, 2011 or Jan. 1, 2012 makes little difference to the charity receiving the money. However, in the 25% bracket for 2011, it can make a $250 difference to your tax bill — but again, only if your total itemized deductions exceed your standard deduction.

Personally, if I can qualify for itemizing my taxes, I want to accelerate my tax savings.

And my favorite quotes fits here:

“Not everything that counts can be counted, and not everything that can be counted counts”. – Albert Einstein

Year-End Tax Planning

Posted by Bruce Mc on Nov 7, 2008 in Form 1040 Information, Tax Preparation | 0 comments

As the end of the year approaches, it’s time to consider strategies that can help you reduce your tax bill. But most tax tips, suggestions, and strategies are of little practical help without a good understanding of your current tax situation. This is particularly true for year-end planning. You can’t know where to go next if you don’t know where you are now.

So take a break from the usual fall chores and pull out last year’s tax return, along with your current pay stubs and account statements. Doing a few quick projections will help you estimate your present tax situation and identify any glaring issues you’ll need to address while there’s still time.

Withholding

If you project that you’ll owe a substantial amount when you file this year’s income tax return, ask your employer to increase your federal income tax withholding amounts. If you have both wage and consulting income and are making estimated tax payments, there’s an added benefit to doing this: Even though the additional withholding may need to come from your last few paychecks, it’s generally treated as having been withheld evenly throughout the year. This may help you avoid paying an estimated tax penalty due to under withholding.

Of course, if you’ve significantly overpaid your taxes and estimate you’ll be receiving a large refund, you can reduce your withholding accordingly, putting money back in your pocket this year instead of waiting for your refund check to come next year.

Alternative minimum tax (AMT)?

Originally intended to prevent the very rich from using “loopholes” to avoid paying taxes, the alternative minimum tax (AMT) snags more and more middle-income taxpayers every year, since (unlike regular income tax) it doesn’t keep pace with inflation. The AMT is governed by a separate set of rules that exist in parallel to those for the regular income tax system. These rules disallow certain deductions and personal exemptions that you are allowed to include in computing your regular income tax liability, and treat specific items, such as incentive stock options, differently. As a result, AMT liability may be triggered by such items as:

       Large numbers of personal exemptions

       Large deductible medical expenses

       Large deductions for state, local, personal property, and real estate taxes

       Home equity loan interest where the financing isn’t used to buy, build, or improve your home

       Exercising a large incentive stock option

       Large amounts of miscellaneous itemized deductions such as unreimbursed employee business expenses

So when you sit down to project your taxes, calculate your regular income tax on Form 1040, and then consider your potential AMT liability using Form 6251. If it appears you’ll be subject to the AMT, you’ll need to take a very different planning approach during the last few months of the year. Even some of the most basic year-end tax planning strategies can have unintended consequences under AMT rules. For example, accelerating certain deductions into this year may prove counterproductive since AMT rules may require you to add them back into your income. See a tax professional for information on your specific tax situation.

Timing

The last few months of the year may be the time to consider delaying or accelerating income and deductions, taking into consideration the impact on both this year’s taxes and next. If you expect to be in a different tax bracket next year, doing so may help you minimize your tax liability. For instance, if you expect to be in a lower tax bracket next year, you might want to postpone income from this year to next so that you will pay tax on it next year instead. At the same time, you may want to accelerate your deductions in order to pay less tax this year.

To delay income to the following year, you might be able to:

       Defer compensation

       Defer year-end bonuses

       Defer the sale of capital gain property (or take installment payments rather than a lump-sum payment)

       Postpone receipt of distributions (other than required minimum distributions) from retirement accounts

To accelerate deductions into this year:

       Consider paying medical expenses in December rather than January, if doing so will allow you to qualify for the medical expense deduction

       Prepay deductible interest

       Make alimony payments early

       Make next year’s charitable contributions this year

Gifts that Give

If you itemize your deductions, consider donating money or property to charity before the end of the current tax year in order to increase the amount you can deduct on your taxes. As an aside, now is also a good time to consider making non-charitable gifts. You may give up to $12,000 ($24,000 for a married couple) to as many individuals as you want without incurring any gift tax consequences. If you gift an appreciated asset, you won’t have to pay tax on the gain; any tax is deferred until the recipient of your gift disposes of the property.

More deductions many people miss

Posted by Bruce Mc on Oct 29, 2008 in Deductions, Form 1040 Information, Tax Preparation, Taxes | 3 comments

How many times have you done your taxes and, three weeks later, learned you had missed the opportunity for a deduction? How can you avoid missing these deductions the next year?

Start planning now.

A number of deductions that my own clients often miss. Here are some of them that can affect your tax bill for 2008 and your tax planning for 2009.

Quicken Medical Expense Manager – Save 36% + Free Shipping

Non-cash contributions

Let’s say you emptied your closets and gave everything to Goodwill or a similar charity. The value of your donated items — clothes, furniture, whatever — is deductible. Get a written receipt. With non-cash charitable contributions, the rule is simple: No receipt means no deduction if you get audited. Clothes and household goods must be in good or better condition to get the deduction. For more see my web page Fair Market Value Guide

If you’ve already dumped your old clothes in a Salvation Army box and walked away without a receipt, take the deduction anyway. You’ve legitimately made the contribution. You just may not be able to prove it in an audit. Starting in 2007, the law required a receipt or some sort of written confirmation for all charitable donations.

If you can, reconstruct as much as you can the list of items you donated and then figure out their market value. For more see my web page/s Fair Market Value Guide

And then, of course, when you make the donation, make sure you get that receipt.

New points on refinancing

With interest rates so low over the past few years — even in 2008 — lots of homes have been refinanced, some more than once.

Any points you pay to refinance your home can be deducted on a monthly basis over the life of the new loan.

Old points on refinancing

This is one deduction lots of people miss. All unamortized points on an old refinancing are deducted in the year of a new refinancing.

So, let’s say you refinanced on June 1, 2007, and paid $2,400 in points. You refinanced again on June 1, 2008 You can deduct all the remaining points on the 2007 loan. That’s $2,280 plus the $50 you could deduct for January through May 2008 Likewise, if you refinance the 2008 loan in 2009 (if interest rates stay low), you will be able to write off the remaining balance on your 2008 return.

Health insurance premiums

Any health insurance premiums you pay, including some long-term-care premiums based on your age, are potentially deductible. You have to add these, however, to your medical expenses. Medical expenses have to exceed 7.5% of your adjusted gross income (AGI) before they give you any tax benefit.

But if you’re self-employed and not covered by any other employer-paid plan, you can deduct 100% your health insurance premiums “above the line.” Above the line means the expense is included in adjusted gross income and doesn’t get lumped in with itemized deductions.

Student higher education expenses

If you qualify for the Hope and Lifetime Learning credits. The Hope credit is worth as much as $1,800 per student subject to income limits for 2008. The Lifetime Learning credit is worth as much as $2,000 per return. Compare the credit with the deduction, and go with the one which gives you the biggest benefit. And, if you don’t qualify for either credit, you may be able to deduct up to $4,000 in education expenses in 2008.

Clean fuel credit

Credits are good because they are a dollar-for-dollar reduction in tax. And if you bought a new hybrid gas-electric auto or truck in 2007, you can get a conservation tax credit of between $250 and $1,000 and an additional fuel economy credit of between $400 and $2,400, depending on the make and the fuel economy.

You get the deduction in the year you start using the car, and you must be the original owner. Take it on your Form 1040 by writing in “clean fuel.”

Consumers must do more legwork to understand what kind of tax savings they might get if they’re buying a specific hybrid car or truck. Check with a dealer or a tax preparer.

Buyers of Toyota’s 2007 Prius hybrid qualify for a $3,150 credit, while its hybrid Highlander sport-utility vehicle and Ford’s hybrid Escape SUV qualify for $2,600.

Honda’s Civic Hybrid gets a $2,100 credit. But its Civic GX compressed natural gas vehicle qualifies for a $4,000 credit, the most for any vehicle.

The Insight qualifies for a $1,450 credit, and the Accord Hybrid qualifies for a $1,300 credit. General Motors’  mild hybrid Silverado and Sierra pickup trucks qualify for a $650 credit.

For a complete list of credits, Summary of the Credit for Qualified Hybrid Vehicles. Also see Tax Credit for Hybrid Vehicles

Investment and tax expenses

Many of us forget tax planning and investment expenses because they are part of miscellaneous itemized expenses. Their total must exceed 2% of your adjusted gross income before you get any tax benefit.

Expenses to track include your employee business expenses, tax preparation fees and even the portion of your legal or accounting fees relating to tax planning. For example, in a divorce, the legal time spent relating to the tax aspects of alimony and child support would qualify. So too would the tax aspects of estate planning.

Many people short change themselves on the deduction of investment expenses. They remember the safety deposit box fees. But how about the annual fee paid your broker and any IRA fees you pay directly? You may remember the cost of your investment publications on subscription — such as Fortune, BusinessWeek, Money. But how about the investment newspapers you buy off the newsstands? You keep track of your long-distance phone calls to your broker and investment adviser, but how about the mileage to go see them?

Casualty deductions

Last year brought hurricanes and fires, not to mention all the flooding, and everyone remembers Hurricanes Katrina and Rita, which devastated the Gulf Coast in 2005.

If President Bush declared your area a disaster area, you can claim your loss either on your 2007 return or your 2008 return. You can confirm whether you qualify on the Federal Emergency Management Agency’s Web site.

Retirement tax credit

This one also can come with a deduction. This credit is designed to give moderate- and low-income taxpayers an incentive to save for retirement.

Make a contribution into your retirement account. That money isn’t taxed currently. So, it’s like you got a deduction off your income. In addition, you get a credit of as much as 50% of the first $2,000 invested. That’s as much as a $1,000 reduction in your tax.

You get the $1,000 tax reduction as well as the $2,000 reduction in your income. That’s a nice rate of return on a $2,000 investment. Moreover, if you qualify, you can deduct as much as $4,000 in contributions to an IRA.

The tax credit disappears as your adjusted gross income increases. Contributions to your 401(k), 403(b), SEP, traditional or even Roth IRAs will qualify as well.

For more on this visit LET UNCLE SAM SUBSIDIZE YOUR RETIREMENT SAVINGS or ANOTHER CREDIT – FORM 8880, or Credit for Qualified Retirement Savings Contribution.