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College Tax Savings Breaks For 2010

Rate Nerd — Wed, 09 Jun 2010 13:29:55 +0000

Cut your college costs with these 2010 tax breaks.

Financing a college education in the 21st century is no small feat.

According to the College Board, the average cost of tuition and fees at a four-year private college for the 2009-2010 academic year was $26,273 and $7,020 for a four-year public university. Add several thousands more for room, board, books and supplies. Fortunately, students, parents and graduates can get some of that money back on their 2010 federal tax return.

The American Opportunity, Hope and Lifetime Learning Credits are likely to yield the biggest tax savings. However, only one of these credits can be claimed per student per year. The American Opportunity and Hope Credits cannot both be claimed on the same return for any students in the same household. However, if the American Opportunity or Hope Credit is claimed for one student, the Lifetime Learning Credit can still be claimed on the same return for another student.

The following requirements apply to all three credits:

Filing status on the return cannot be married filing separately.
The student must be you, your spouse or dependent for whom you claim an exemption.
A dependent cannot claim the credits if claimed on another person’s (i.e. parents’) return.
If you do not claim the dependent exemption (even if entitled to the exemption), you cannot claim a credit based on that dependent’s expenses.
Claim credits on Form 8863 and file with your Federal 1040.

The American Opportunity Credit, scheduled to expire after 2010, is a modified version of the Hope Credit. It’s worth up to $2,500 for tuition, fees and course materials per student for the first four years of postsecondary education. Even if you have zero tax liability, you can get up to 40 percent as a refund. It phases out at higher incomes and cannot be claimed with the Hope Credit on the same return.

The Hope Credit is worth up to $1,800 per student for the first two years of postsecondary education. Expenses may include tuition, fees and course-related materials (as long as the expense for those materials are required to be paid to the educational institution). It phases out at higher incomes, and a student or family claiming the Lifetime Learning Credit or Tuition and Fees Deduction for that same student is ineligible.

If you don’t qualify for the American Opportunity or Hope Credits, consider the Lifetime Learning Credit. Up to 20 percent of the first $10,000 in higher education expenses per family can be claimed for an unlimited number of years. It phases out at higher incomes.

You may also qualify for the Tuition and Fees Deduction, given on a per-student, per-year basis. In other words, you cannot claim the deduction for Student A if you’re claiming one of the above credits for that student, but you may still claim the deduction for Student B. You can deduct up to $4,000 for tuition and fees on Form 8917, regardless of whether you itemize or take the standard deduction. The deduction phases out at higher incomes, and cannot be claimed if you’re married filing separately or claimed as a dependant on another return.

In addition to these credits or deductions, up to $2,500 in student loan interest paid each year for qualified higher education expenses can be deducted on your Federal 1040, even if you don’t itemize. This deduction phases out at higher incomes, and is reduced by non-taxable distributions from a Coverdell Education Savings Account, savings bond interest used for education expenses and scholarships or veteran’s education benefits. Married taxpayers filing separately and people claimed as a dependent on another return don’t qualify.

2010 is also the last year costs paid or incurred for computer technology, equipment and Internet service for students living at home count as a qualified expense for Qualified Tuition Programs (aka 529 Savings Plans). Items must be used by the beneficiary and beneficiary’s family during the years enrolled at an eligible institution.

Additional exceptions may apply to the aforementioned tax breaks, and other educational tax benefits exist for student loan cancellations and repayment assistance, Coverdell Education Savings Accounts, education savings bonds, employer-provided educational assistance and work-related education. Learn more about all education tax benefits in Publication 970 at www.irs.gov.

- Article Courtesy of ARAContent

Top 7 Tax Deductions For Homeowners

Rate Nerd — Mon, 12 Apr 2010 16:39:51 +0000

At tax time, your house is not simply a home: It’s also a tax deduction.

But there are other tax deductions besides mortgage interest you can take on your principal residence or second home — such as property taxes — and in some cases the cost of Private Mortgage Insurance.

You know that you can get an income tax deduction on the mortgage interest you pay. Your home also provides a shelter from taxes you may not have considered. You get to deduct:

Your property taxes. And if you bought the home in 2009, you may be able to deduct more property taxes than you think. Don’t forget to include taxes you may have reimbursed the seller for—taxes the seller had already paid before you took ownership. You won’t get a 1098 report listing these taxes. Instead, that amount will be shown on the settlement sheet.
Property taxes for taxpayers who don’t itemize. You can increase your 2009 standard deduction by up to $500 for real estate taxes paid in 2009 or by up to $1,000 for real estate taxes paid in 2009 if you are married and file jointly.
The mortgage interest on your primary residence, as well as on a second residence. (There are limits, but relatively few taxpayers are affected.)
The interest on up to $100,000 borrowed on a home equity loan or home equity line of credit, regardless of the reason for the loan.
Points that you paid when you purchased the house (or those that you convinced the seller to pay for you).
The premiums paid for Private Mortgage Insurance (PMI) in 2009, but only for policies issued after 2006. The right to this deduction disappears as Adjusted Gross Income rises from $100,000 to $110,000 (or $50,000 to $55,000 for those who use married filing separately status.)
Home improvements required for medical care.

How much can you save? The actual amount of money you save on your annual income tax bill depends on a variety of factors:

Your filing status (single, head of household, married filing jointly, married filing separately)
Your standard deduction amount
Your other itemized deductions
Your taxable income
Your home-related itemized deductions, plus your other itemized deductions must add up to more than the standard deduction (increased by the amount of property taxes noted earlier that are allowed to non-itemizers), or they won’t save you any money.

What can’t I deduct? You can’t deduct the following payments for a personal residence:

Dues to a homeowners association
Insurance on your home
Appraisal fees for your home
The cost of improvements to your home, except in the relatively rare case where they qualify as a medical expense. (But keep those receipts. They may help you reduce your taxes when you sell your home.)

And dont forget these important tax credits you may be eligible for:

New Home Tax Credit. If you purchased a home in 2009, you may qualify for the first-time homebuyer tax credit. Keep in mind the name of the tax credit is deceiving, as current and past homeowners may also qualify. The tax credit is equal to 10 percent of the purchase price, up to either $6,500 or $8,000, depending on the purchase date, price, whether you’ve owned a primary residence and when you last owned a primary residence. Income level and filing status also affect eligibility. Those claiming the tax credit must mail their federal returns along with certain documentation for the home.

Energy Efficiency Tax Credit. Energy efficient improvements made in 2009 and 2010 may give homeowners up to $1,500 through the Nonbusiness Energy Property Credit. Up to 30 percent of the costs for qualifying improvements to a primary residence can be claimed.

Use TurboTax to help ensure you don’t miss any of the deductions or credits you deserve, so you get your biggest refund, guaranteed.

– Content courtesy of TurboTax contributed to this article

Having a Baby? What Are the Tax Implications?

Rate Nerd — Wed, 07 Apr 2010 17:20:36 +0000

The birth of a child is not just a blessed event – it’s the beginning of a whole new set of tax breaks for your family.

Learn how the newest addition to your family can trim your tax bill, and how to save for your child’s future in the most tax-efficient manner.

Get a Social Security number

Your key to tax benefits is a Social Security number. You’ll need one to claim your child as a dependent on your tax return. Failing to report the number for each dependent can trigger a $50 fine and tie up your tax refund until things are straightened out.

You can request a Social Security card for your newborn at the hospital at the same time you apply for a birth certificate. If you don’t, it can be a real hassle. You’ll need to file a Form SS-5 with the Social Security Administration, and provide proof of the child’s age, identity and U.S. citizenship.

If registering newborns strikes you as silly, keep in mind that the aim is to prevent taxpayers from claiming dependents they don’t deserve (think parakeets and puppies). Apparently, it’s working. In the first year the government required Social Security numbers, 7 million fewer dependents were claimed than the year before.

Dependency Exemption

Claiming your son or daughter as a dependent will shelter $3,650 of your income from tax in 2009, saving you a quick $912 if you’re in the 25 percent bracket. (The exemption will be worth the same on 2010 returns.) You get the full-year’s exemption no matter when during the year the child was born or adopted.

$1,000 child tax credit

A new baby also delivers a $1,000 child tax credit, and this is a gift that keeps on giving every year until your dependent son or daughter turns 17. You get the full $1,000 credit no matter when during the year the child was born. Unlike a deduction that reduces the amount of income the government gets to tax, a credit reduces your tax bill dollar-for-dollar.

The credit is phased out at higher income levels, beginning to disappear as income rises above $110,000 on joint returns, and above $75,000 on single and head of household returns. For some lower-income taxpayers, the credit is “refundable,” meaning that if it exceeds your income tax liability for the year, the IRS will issue a refund check for the difference. Don’t assume you can’t qualify for the refundable credit just because you didn’t qualify in prior years.

Fix your withholding at work

Since claiming an extra dependent will cut your tax bill, it also means you can cut back on tax withholding from your paycheck. File a new W-4 form with your employer to claim an additional withholding “allowance.”

For a new parent in the 25 percent bracket, that will cut withholding—and boost take-home pay—by about $75 a month. You can also take the child credit into account on your W-4, pushing withholding down by as much as $150 a month if you qualify for the full credit.

Tax Filing Status

If you are married, having a child will not affect your filing status. But if you’re single, having a child may allow you to file as a head of household rather than using the single filing status.

That would give you a bigger standard deduction and more advantageous tax brackets. To qualify as a head of household, you must pay more than half the cost of providing a home for a qualifying person—and your new son or daughter qualifies.

Earned income credit

For a couple without children, the chance to claim the Earned Income Tax Credit (EITC) disappears when income on a joint return exceeds $18,440 in 2009. (For single filers the 2009 limit is $13,440.) The table below shows the income limits to qualify for the credit for joint and single filers, based on how many children you have.The income limits—when the right to claim the EITC disappears—will increase, but only very slightly, for 2010.

2009 EIC Income Limit	Joint-Filers	Single-Filers
No children	$18,440	$13,440
1 child	$40,463	$35,463
2 children	$45,295	$40,295
3 or more children	$48,279	$43,279

Child care tax credit

If you pay for child care to allow you to work—and earn income for the IRS to tax—you can earn a credit worth between $600 and $1,050 if you’re paying for the care of one child under age 13, or between $1,200 and $2,100 if you’re paying for the care of two or more children under 13. The size of your credit depends on your income and how much you pay for care (you can count up to $3,000 for the care of one child and up to $6,000 for the care of two or more).

Lower income workers with an Adjusted Gross Income of $15,000 or less can claim a credit of up to 35 percent of qualifying costs; the percentage gradually drops to a floor of 20 percent for taxpayers reporting AGI over $43,000.

Child care reimbursement account

You may have an even more tax-friendly way to pay your child care bills than the child care credit: a child care reimbursement account at work. These accounts, often called Flex Plans, let you divert up to $5,000 a year of your salary into a special tax-advantaged account that you can then tap to pay child care bills.

Money you run through the account avoids both federal and state income taxes as well as Social Security and Medicare taxes, so it could easily save you more than the value of the credit. You can’t double dip by using both the reimbursement account and the credit. But note that while the limit for Flex accounts is $5,000, the credit can be claimed against up to $6,000 of eligible expenses if you have two or more children. So even if you run $5,000 through a Flex account, you could qualify to claim the 20 percent to 35 percent credit on up to $1,000 more.

Although you generally can only sign up for a Flex account during “open season,” most companies allow you to make mid-year changes in response to certain “life events,” including the birth of a child.

Adoption Tax credit

There’s also a tax credit to help offset the cost of adopting a child. The credit is worth as much as $12, 50 in 2009 and will increase to $12,170 in 2010. If you adopt a “special needs” child, you can claim these full credit amounts even if your actual adoption costs are less. For 2009, this credit phases out as Adjusted Gross Income for all taxpayers rises from $182,180 and $2,180. For 2010, the credit will be phased out for incomes between $182, 520 and $222,520.

Save for college

It’s never too early to start saving for those college bills. And it’s no surprise the Congress has included some tax goodies to help parents save. One option is a Section 529 State Education Savings Plan. Contributions to these plans are not deductible on your federal taxes, but earnings grow tax-free and payouts are tax-free, too, if the money is used to pay qualifying college bills. (Many states give residents a state tax deduction if they invest in their state’s 529 Plan. Visit your state’s official website for details.) There are no income restrictions on 529 Plan contributions.

You may also want to fund a Coverdell Education Savings Account (ESA) for your newborn. Up to $2,000 a year can go into an ESA for any beneficiary. Again, there is no deduction for deposits, but earnings are tax-free if used to pay education expenses. ESA money can pay for elementary and high school expenses (even a computer used for school and educational software), as well as for college costs. The right to contribute to an ESA phases out as income rises from $95,000 to $110,000 on single returns, and from $190,000 to $220,000 on joint returns.

Kid IRAs

You may have heard about Kid IRAs and the fact that relatively small investments when a child is young can grow to eye-popping balances over many decades. It’s true, but there’s a catch. You can’t just open an IRA tax shelter for your newborn and start shoveling in the cash.

A person must have earned income from a job or self-employment in order to have an IRA. Gifts and investment income don’t count. So you probably can’t open an IRA for your newborn (unless, perhaps, he or she gets paid for being an infant model). But as soon as your youngster starts earning some money—babysitting or delivering papers, for example, or helping out in the family business—he or she can open an IRA. The phenomenal power of long-term compounding makes it a great idea.

A Roth IRA is an ideal choice for most kids who are in a low tax bracket, so a tax deduction is of little value. With a Roth IRA there’s no up-front tax break, but their savings will benefit from years of tax-free growth, and withdrawals in retirement are tax-free.

Kiddie Tax

So far, this article has had nothing but good news. But the Kiddie Tax is not good news. Here is what you need to know:

The graduated nature of our federal income tax rates—with higher tax rates on higher incomes—creates opportunities for savings if you can shift income to someone (such as a child) in a lower tax bracket. But don’t try to pull any punches. For example, let’s say Dad has $1,000,000 invested in bonds which pay $50,000 of taxable interest each year. As a resident of the 35 percent tax bracket, that extra income hikes his tax bill by $17,500. But if he could divvy up the money among five children, each of whom earned $10,000, the money would be taxed in the 10 percent bracket and the family could save $12,500 in tax, right? Nice try—but it won’t work.

To prevent such shenanigans, Congress created the Kiddie Tax to tax most investment income earned by a dependent child at the parents’ top tax rate. For 2009 and 2010, the first $950 of a child’s “unearned” income (that’s income that’s not earned from a job or self- employment) is tax-free and the next $900 is taxed at the child’s own rate (probably 10 percent). Any additional income is taxed at the parents’ rate—as high as 35 percent. Under current rules, the kiddie tax applies until the year a child turns 19 (or 24 if he or she is a dependent full-time student.)

Nanny Tax

The Nanny Tax is also not good news, but it’s fair. If you lawfully hire someone to come into your home to help care for your new child, you could become an employer in the eyes of the IRS—and face a whole new set of tax rules. If you hire your nanny or caregiver through an agency, the agency may be the employer and have to take care of all the paperwork. But if you’re the employer—and you pay more than $1,700 a year—you’re responsible for paying Social Security, Medicare and unemployment taxes for your caregiver, and reporting the wages to the caregiver and to the IRS on Form W-2. The $1,700 Nanny Tax threshold applies applies for both 2009 and 2010.

TurboTax Deluxe has the information you need to maximize your child-related deductions.

- Contributions from TurboTax appreciated for this article

The 11 Most Overlooked Tax Deductions

Rate Nerd — Fri, 02 Apr 2010 16:16:55 +0000

Don’t overpay taxes by overlooking tax deductions.

See the most common errors taxpayers make on their tax returns, so you don’t make the same mistakes.

The most recent numbers from 2007 show that nearly 51 million people itemized deductions claiming more than $1.33 trillion worth of deductions. Another 91 million taxpayers only claimed the standard deduction. Some of those who took the easy way out probably shortchanged themselves. (If you turned 65 in 2009, remember that you deserve a bigger standard deduction than younger folks.)

Here are our 11 most overlooked tax deductions. Claim them if you deserve them, and keep more money in your pocket.

1. State sales taxes

This write-off makes sense primarily for those who live in states that do not impose an income tax. You must choose between deducting state and local income taxes, or state and local sales taxes. For most citizens of income-tax states, the income tax deduction usually is a better deal. IRS has tables for residents of states with sales taxes showing how much they can deduct. But the tables aren’t the last word.

If you purchased a vehicle, boat or airplane, you get to add the state sales tax you paid to the amount shown in IRS tables for your state, to the extent the sales tax rate you paid doesn’t exceed the state’s general sales tax rate. The same goes for home building materials you purchased. These items are easy to overlook. The IRS even has a calculator on its Web site to help you figure out the deduction, which varies by your state and income level.

The American Recovery and Reinvestment Act permits taxpayers to take a deduction for state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. The deduction is available on new vehicles purchased from Feb. 17, 2009, through Dec. 31, 2009. In states that don’t have a sales tax, the law provides a deduction for other taxes or fees paid. This deduction is available whether or not a taxpayer itemizes deductions on Schedule A.

The deduction is limited to the taxes and fees paid on up to $49,500 of the purchase price of an eligible vehicle. The deduction is reduced for joint filers with modified adjusted gross incomes (MAGI) between $250,000 and $260,000 and other taxpayers with MAGI between $125,000 and $135,000. Taxpayers with higher incomes do not qualify.

Taxpayers who make qualifying new vehicle purchases this year can estimate the deduction with the help of IRS Publication 919.

2. Reinvested dividends

This isn’t really a deduction, but it is a subtraction that can save you a lot of money. And it’s one that many taxpayers miss. If, like most investors, you have mutual fund dividends automatically invested in extra shares, remember that each reinvestment increases your “tax basis” in the fund. That, in turn, reduces the taxable capital gain (or increases the tax-saving loss) when you redeem shares.

Forgetting to include the reinvested dividends in your cost basis—which you subtract from the proceeds of sale to pinpoint your gain—means overpaying your taxes. TurboTax Premier and Home & Business tax preparation solutions include a very cool tool—Cost Basis Lookup—that will figure your basis for you and make sure you get credit for every dime of reinvested dividends.

3. Out-of-pocket charitable contributions

It’s hard to overlook the big charitable gifts you made during the year by check or payroll deduction. But the little things add up, too, and you can write off out-of-pocket costs you incur while doing good deeds. Ingredients for casseroles you regularly prepare for a nonprofit organization’s soup kitchen, for example, or the cost of stamps you buy for your school’s fundraiser count as a charitable contribution. If you drove your car for charity in 2009, remember to deduct 14 cents per mile.

4. Student loan interest paid by Mom and Dad

Until recently, if parents paid back a student loan incurred by their children, no one got a tax break. To get a deduction, the law held that you had to be both liable for the debt and actually pay it yourself. But now there’s an exception. If Mom and Dad pay back the loan, the IRS treats it as though they gave the money to their child, who then paid the debt. So a child who’s not claimed as a dependent can qualify to deduct up to $2,500 of student loan interest paid by Mom and Dad.

5. Moving expense to take first job

Here’s an interesting dichotomy: Job-hunting expenses incurred while looking for your first job are not deductible, but moving expenses to get to that first job are. And you get this write-off even if you don’t itemize. If you moved more than 50 miles, you can deduct 24 cents per mile of the cost of getting yourself and your household goods to the new area, (plus parking fees and tolls) for driving your own vehicle.

6. Property tax deduction for non-itemizers

If you don’t itemize your deductions but paid property taxes, you qualify for an additional standard deduction of up to $500 (up to $1,000 if married filing jointly). While this benefit was initially good only for 2008, Congress extended it into 2009. There are no income limits to claim this extra deduction.You claim the deduction as an addition to your regular standard deduction on Form 1040 or Form 1040A.

7. Child care credit

A credit is so much better than a deduction—it reduces your tax bill dollar for dollar. So missing one is even more painful than missing a deduction that simply reduces the amount of income that’s subject to tax.

But it’s easy to overlook the child care credit if you pay your child care bills through a reimbursement account at work. Until a few years ago, the child care credit applied to no more than $4,800 of qualifying expenses. The law allows you to run up to $5,000 of such expenses through a tax-favored reimbursement account at work.

Now, however, up to $6,000 can qualify for the credit, but the old $5,000 limit still applies to reimbursement accounts. So if you run the maximum $5,000 through a plan at work but spend more for work-related child care, you can claim the credit on up to an extra $1,000. That would cut your tax bill by at least $200.

8. Earned Income Tax Credit

Millions of lower-income people miss out on this every year. In 2008, 24 million taxpayers used the EITC program to claim more than $48 billion, or an average of $2,000. However, 25% of taxpayers who are eligible for the earned income credit fail to claim it, according to the IRS. Some people miss out on the EITC because the rules can be complicated. Others simply aren’t aware that they qualify.

The EITC is a refundable tax credit – not a deduction – ranging from $438 to $4,824. The credit is designed to supplement wages for low-to-moderate income workers. But the credit doesn’t just apply to lower income people. Tens of millions of individuals and families previously classified as “middle class” – including many white-collar workers – are now considered “low income” because they lost a job, took a pay cut, or worked fewer hours last year.

The exact refund you receive depends on your income, marital status and family size. To get a refund from the EITC you must file a tax refund, even if you don’t owe any taxes. Moreover, if you were eligible to claim the earned income tax credit in the past but didn’t, you can file any time during the year to claim an EITC refund for up to three previous tax years.

Another feature is that you can get the credit sooner rather than later. If you expect to qualify for the credit in 2009 and you have at least one dependent child, you can request part of that credit immediately under the “Advance EITC Program.” You must fill out a Form W-5, which will probably only take you a few minutes to complete.

9.State tax you paid last spring

Did you owe tax when you filed your 2008 state tax return in the spring of 2009? Then remember to include that amount with your state tax deduction on your 2009 return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments.

10. Refinancing points

When you buy a house, you get to deduct points paid to obtain your mortgage in one fell swoop. When you refinance a mortgage, however, you have to deduct the points over the life of the loan. That means you can deduct 1/30th of the points a year if it’s a 30-year mortgage—that’s $33 a year for each $1,000 of points you paid. Doesn’t seem like much, but why throw it away?

Also, in the year you pay off the loan—because you sell the house or refinance again—you get to deduct all the points not yet deducted, unless you refinance with the same lender.

11. Jury pay paid to employer

Some employers continue to pay employees’ full salary while they are doing their civic duty, but ask that they turn over their jury fees to the company coffers The only problem is that the IRS demands that you report those fees as taxable income. You have a right to deduct the amount so you aren’t taxed on money that simply passes through your hands.

Use TurboTax to help ensure you don’t miss any of the deductions or credits you deserve, so you get your biggest refund, guaranteed.

– Article content courtesy of TurboTax

Bigger Federal Tax Credit For Paying For College

Rate Nerd — Mon, 29 Mar 2010 15:08:22 +0000

Finally, a Bigger, Better College Tax Credit.

A key tax credit that helps families pay for college gets a major boost in the 2009 stimulus bill. The credit is bigger, covers more years of college, and helps more taxpayers.

The law renames the Hope College credit for 2009 and 2010—it’s now known as the American Opportunity tax credit—and hikes its value from $1,800 to $2,500 for 2009 and 2010.

Because a tax credit reduces your tax bill dollar for dollar, this basically means Uncle Sam will give you up to $2,500 per year for each qualifying college student in your family.

And, unlike the old Hope credit, which was available only for a student’s first two years of college, the new American Opportunity credit can be claimed for four years of post-high-school education. You get the maximum credit if you spend at least $4,000 in qualifying expenses, which now include the cost of books as well as tuition and fees.

More credit for lower- and higher-income taxpayers

If you’re a lower-income taxpayer and the credit is worth more than your tax bill for the year, up to 40 percent of the credit (as much as $1,000) will be paid to you as a tax refund. The old Hope credit could wipe out your tax bill but never give you cash back.

There’s also good news for some higher-income taxpayers: The new rules greatly expand the number of families who will qualify for the credit. The old Hope credit was phased out for single taxpayers with Adjusted Gross Income (AGI) greater than $50,000 and it disappeared altogether at $60,000. For couples filing jointly, the credit phased out between $100,000 and $120,000 of AGI. (AGI is basically taxable income before subtracting personal and dependent exemptions and standard or itemized deductions.)

Now the credit starts to decrease at $80,000 for single taxpayers and disappears at $90,000. For married taxpayers filing jointly, those thresholds are now $160,000 and $180,000.

What if you already used the Hope credit for the first two years of a child’s college bills? If your child is a junior in 2009, you can use the American Opportunity credit for the child’s junior and senior years.

Who qualifies for the American Opportunity Tax Credit?

The other rules for qualifying for the American Opportunity credit are the same as for the Hope credit.

The student must be enrolled at least half-time in a program pursuing an undergraduate degree or other recognized educational credential. You can claim the credit for expenses paid for yourself, your spouse, or a child who is claimed as a dependent on your tax return. If the student is claimed as a dependent on a parent’s tax return, the parent gets the credit, regardless of who actually pays the qualifying expenses.

The changes in the Hope credit do not affect the Lifetime Learning credit (which applies to higher education not covered by the Hope or American Opportunity credit) for education after the first two or four years, or for classes taken (1) less than half-time or (2 ) not in pursuit of a degree.

The Lifetime Learning credit, which can be claimed for graduate school, for example, or a single post-high-school class, is worth up to $2,000. (The credit is actually 20 percent of the first $10,000 of qualifying costs.) The income phase-out zone is lower than for the new American Opportunity credit. For 2008 and 2009 returns, the Lifetime Learning credit gradually disappears as AGI rises from $50,000 to $60,000 on single returns and from $100,000 to $120,000 on joint returns.

Certain parents should just say no to the American Opportunity Tax Credit

Despite all the improvements, some parents should skip the American Opportunity credit and instead stick with the Hope credit when they file their 2009 returns in 2010. This applies to families with students who are freshmen or sophomores in colleges and universities in parts of the Midwest.

As part of legislation designed to aid victims of the 2008 floods and other weather-related disasters, Congress doubled the Hope credit for students attending school in parts of seven states: Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska and Wisconsin. That means qualifying students can receive a Hope credit worth $3,600 in 2009—$1,100 more than the new, improved American Opportunity credit. IRS publication 970 has a list of the counties in each state in which qualifying schools are located.

–Content courtesy of TurboTax contributed to this article

Last Minute Tax Tips From A Seasoned Pro

Rate Nerd — Fri, 26 Mar 2010 18:27:32 +0000

April 15 is fast approaching and before you put the finishing touches on those returns, below are a few items to consider – for this year’s return as well as next year’s.

It’s always a good idea to think about your income taxes from two perspectives, according to Robert Fishbein, vice president and corporate counsel for Prudential Financial. First, what can you do now on your tax return to reduce your income tax liability? Second, what types of tax planning should you do to position yourself best for 2010 and beyond?

If you are a first-time homebuyer then you may be eligible for the first-time homebuyer tax credit of 10 percent of the purchase price of your new home up to $8,000. Another item is a tax credit of 30 percent of the cost of an energy-efficient improvement to your home up to $1,500. One commonly overlooked is a special $1,000 deduction for real property taxes paid by an individual who does not itemize deductions.

Two planning items to consider now, in preparation for next year’s return, are the possibility of higher income tax rates in 2011 and the new opportunity to convert from a traditional IRA to a Roth IRA.

Tips for 2009 tax returns

While there are many things to think about for your 2009 income tax return, below are a few that can be easily overlooked:

If you are a first-time homebuyer then you may be eligible for the first-time homebuyer tax credit of 10 percent of the purchase price of your new home up to $8,000. Make sure you have all the documentation you need to support this claim, like the Form HUD-1 Settlement Statement, since the IRS will be on the watch to make sure that claims are legitimate. Also, since there are documentation requirements for the credit you will have to file a paper return and are not eligible for electronic filing.

Another item to keep your eye on for 2009 is a possible income tax credit of 30 percent of the cost of an energy-efficient improvement to your home up to $1,500 (for 2009 and 2010 combined). The credit can be available for such things as adding insulation, energy-efficient windows or energy-efficient heating and cooling systems. The IRS has issued guidance on what qualifies as “energy efficient” for purposes of the credit, but check with the manufacturer of the product to make sure it qualifies for the credit and keep your receipt to document the purchase.

Both the first-time homebuyer credit and energy credit reduce your tax liability dollar for dollar. You don’t want to leave these valuable benefits on the table when completing your 2009 income tax return.

Remember also that you can make an IRA contribution for the 2009 tax year until the due date of your return, or April 15 this year. So even if you have not yet made your 2009 IRA contribution it is not too late. And while you are at it, why not make your contribution for 2010 and lock in those savings now? There is no better way to secure your retirement than by saving as much as you can each year.

The Making Work Pay tax credit replaced the 2008 federal stimulus checks for 2009 and 2010. You likely received an increase of $10 to $13 in your paychecks starting in April 2009. Most taxpayers already received the benefit for 2009 through reduced federal withholding. Even if you received this benefit in each paycheck, you’ll generally still need to claim the credit on your 2009 tax return. The credit on your federal return makes up for the reduced withholding throughout the year.

Finally, one commonly overlooked item on income tax returns is a special $1,000 deduction for real property taxes paid by an individual who does not itemize deductions. There are many individuals who own homes who do not have high enough deductions to itemize and choose the standard deduction, especially in states where there is no income tax. However, if you do pay real property taxes and you do not itemize there is a special tax law provision that allows you to deduct $1,000 of the property taxes paid — at 25 percent that is a $250 savings.

Preparing for next year’s tax return

2010 is a unique tax planning year because the Bush tax cuts are scheduled to automatically expire at year end, which means that ordinary income and capital gains rates are going up unless Congress takes action. This flips traditional tax planning on its head since the traditional planning approach is to delay income and accelerate deductions to try to minimize your tax liability. But if rates are going up you may want to pay taxes now at rates that are lower than in the future and you may want to delay using deductions for when rates are higher and more valuable.

One example of accelerating income would be to contribute to an after-tax retirement vehicle like a Roth 401(k) or a Roth IRA. Since you are paying the income tax up front you can pay the tax at what might be lower rates today. In exchange you are creating an income tax-free retirement asset, subject to satisfying the applicable age and holding requirements.

An example of how you can delay an income tax deduction until 2011, when rates may be higher and the deduction more valuable, is choosing to make more charitable contributions in 2011. If you typically make a charitable gift at the end of the year, by waiting until January you may increase the value of that deduction.

Prudential Financial, its affiliates, and their licensed financial professionals do not render tax or legal advice. Please consult with your tax and legal advisors regarding your personal circumstances. Prudential Financial, Inc, Newark, NJ.

– Article Courtesy of ARAcontent

7 Tax Cuts You May Have Missed

Rate Nerd — Fri, 05 Mar 2010 06:10:47 +0000

Watch for these changes on your 2009 tax return.

More than 25 tax cuts for 2009 federal returns have been passed to help those struggling in the downturned economy. Many states are also offering tax breaks this year.

“Virtually everyone is eligible for new tax credits, deductions and other changes on their federal tax returns,” says Jessi Dolmage, spokeswoman for a tax software preparation firm. Dolmage summarizes seven changes that could impact your bottom line.

1) Making Work Pay Tax Credit.

The Making Work Pay tax credit replaced the 2008 federal stimulus checks for 2009 and 2010. The refundable credit is worth 6.2 percent of your earned income, up to $400 for individuals and $800 for married couples filing jointly. The tax credit phases out for married couples filing jointly with a modified adjusted gross income (MAGI) between $150,000 and $190,000, and for single taxpayers whose MAGI is between $75,000 and $95,000.

Most taxpayers already received the tax credit for 2009 through reduced federal withholding starting in April 2009, resulting in an increase of $10 to $13 per paycheck. Even if you received the tax credit in your paychecks, you generally still need to claim the tax credit on your federal tax return to make up for the reduced withholding throughout the year. If you don’t withhold federal taxes, you must file a return to receive the tax credit.

If you received the one-time economic recovery payment or qualify for the Government Retiree Credit, the amount must be subtracted from any Making Work Pay tax credit amount.

2) Standard Deduction.

For the 2009 tax year, your standard deduction may also include state or local real estate taxes of up to $500 ($1,000 for married filing jointly) and net disaster losses that occurred before Jan. 1, 2010.

3) Unemployment Benefits.

The first $2,400 of unemployment compensation is exempt from 2009 federal taxes. Any amount over $2,400, as well as severance pay, is taxable income.

4) New Home Tax Credit.

If you purchased a home in 2009, you may qualify for the first-time homebuyer tax credit. Keep in mind the name of the tax credit is deceiving, as current and past homeowners may also qualify. The tax credit is equal to 10 percent of the purchase price, up to either $6,500 or $8,000, depending on the purchase date, price, whether you’ve owned a primary residence and when you last owned a primary residence. Income level and filing status also affect eligibility. Those claiming the tax credit must mail their federal returns along with certain documentation for the home.

5) Energy Efficiency Tax Credit.

Energy efficient improvements made in 2009 and 2010 may give homeowners up to $1,500 through the Nonbusiness Energy Property Credit. Up to 30 percent of the costs for qualifying improvements to a primary residence can be claimed.

6) Tuition Tax Credit.

The modified HOPE credit, the American Opportunity Credit, is equal to 100 percent of the first $2,000 and 25 percent of the next $2,000 (totaling up to $2,500 per student) for tuition, related fees and required course materials. It applies to the first four years of post-secondary education in 2009 and 2010. The refundable tax credit phases out at MAGIs of $80,000 for individuals and $160,000 for joint filers.

7) Charitable Gift Tax Credit.

Finally, if you made a cash contribution towards earthquake relief efforts in Haiti after Jan. 11, 2010, and before March 1, 2010, you can deduct it on your 2009 or 2010 return (but not both).

For information about all 2009 tax law changes, visit www.IRS.gov.

– Article Courtesy of ARAcontent

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8 Biggest IRA Mistakes Most People Make

Rate Nerd — Fri, 26 Feb 2010 15:11:59 +0000

Saving more for retirement is always a good idea, especially now.

Saving as much as possible, handling rollovers correctly and avoiding costly penalties are the keys to success. See if you made any of these 8 big mistakes.

In 2009, the Employee Benefit Research Institute estimated that Individual Retirement Accounts (IRAs), a cornerstone of retirement savings, sank to a median value of less than $29,000 post-financial meltdown.

That leaves many Americans working even harder to recoup their losses and stay on track to make retirement a reality. The good news is that many people can increase their saving potential simply by learning more about IRA dos and don’ts.

“There’s no question that saving through an IRA is a strategic move, but it’s not quite as simple as ’set it and forget it,’” says J.J. Montanaro, a Certified Financial Planner with USAA. “Staying aware of what to do and what not to do can really pay off, especially now, when you have the opportunity to invest and potentially save on your tax bill.”

Montanaro outlines eight of the most common mistakes IRA investors make when it comes to making the most of this retirement-saving tool:

Thinking you’ve missed the deadline: Though 2009 is over, it’s not too late to make your IRA contribution count toward this year’s tax bill. This year, you have until April 15 to make “2009″ IRA contributions and claim eligible deductions on your tax return.
Not contributing enough: Contributions to a Traditional IRA are tax deductible, within limits, so you can help secure your future and cut this year’s tax bill at the same time. If you’re younger than 50 years old, you can contribute up to $5,000 annually. Maxing it out makes for maximum tax savings.
Not playing catch-up: Age does have its rewards. If you’re 50 or older, you may be eligible to contribute an extra $1,000 (up to $6,000 per year) to an IRA account. This “catch-up” contribution offers a chance to kick your savings into overdrive.
Assuming you can’t contribute: If you’re a stay-at-home spouse, you can still open an IRA as long as contributions from both spouses don’t exceed your combined taxable compensation. A “spousal IRA” is especially handy when the working spouse is already covered by an employer retirement plan and can’t deduct IRA contributions. What you can deduct will depend on your Modified Adjusted Gross Income (MAGI), but every bit counts.
Rolling the wrong way: If you’ve recently switched jobs or lost your job, you can roll the funds from your old employer’s retirement plan into an IRA. Just be sure the transfer is made directly from one custodian to the next – a direct rollover. If the payout goes to you first, it will be subject to a mandatory 20 percent withholding tax. Then, you’ll have only 60 days to move the funds you received, plus the 20 percent that was withheld, to a new account or you’ll have to pay income taxes on the distribution, plus an early withdrawal penalty if you’re not at least age 59 1/2.
Not considering a Roth: You might be able to save more on taxes in the long run by contributing to a Roth IRA instead of a Traditional IRA depending upon your tax situation. Roth IRA contributions aren’t tax deductible, but the Roth can provide tax-free withdrawals come retirement time. And starting this year, the income restrictions to convert a Traditional IRA to a Roth IRA have been eliminated, opening the door to millions more investors. Ask a trusted financial adviser if opening or converting to a Roth IRA would be the right move for you. It’s important to keep in mind that conversions from a Traditional IRA to a Roth IRA are subject to ordinary income taxes, so it’s recommended that you consult with a tax advisor regarding your particular situation.
Withdrawing too early: Your IRA is designed to remain untouched until you reach age 59 1/2. If you make a withdrawal from your Traditional IRA before then, you’ll have to pay taxes on the income and investment earnings, and fork over a 10 percent penalty, with some exceptions. While a Roth IRA allows you to withdraw your contributions, not including earnings, at any time without taxes or penalties, you’ll thank yourself later for not raiding the piggy bank.
Procrastinating: More than any technicality, it’s plain old procrastination that hurts investors the most. Whether its uncertainty in the markets, cash flow concerns or the rising costs of college, there will always be excuses to put off this year’s IRA contribution. But time-honored investing principles show that consistent contributions – through good times and bad – provide the clearest path to long-term investing success. So make the commitment and take action to help secure your financial future now.

For complete IRA details, visit www.irs.gov and search for Publication 590.

–Article Courtesy of ARAcontent

How The 2009 Making Work Pay Tax Credit Works

Rate Nerd — Fri, 19 Feb 2010 14:01:22 +0000

The “Making Work Pay” tax credit has many taxpayers confused, and for some, the confusion has led to the shock of smaller or delayed refunds.

The Making Work Pay tax credit replaced the 2008 federal stimulus checks for 2009 and 2010. You likely received an increase of $10 to $13 in your paychecks starting in April 2009.

Most taxpayers already received the benefit for 2009 through reduced federal withholding. Even if you received this benefit in each paycheck, you’ll generally still need to claim the credit on your 2009 tax return. The credit on your federal return makes up for the reduced withholding throughout the year.

The refundable credit is worth 6.2 percent of your earned income, up to $400 for individuals and $800 for married couples filing jointly. If you don’t withhold federal taxes, you must file a federal tax return to receive the credit.

The credit phases out for married couples filing jointly with an modified adjusted gross income (MAGI) between $150,000 and $190,000, and for single taxpayers whose MAGI is between $75,000 and $95,000.

Why the Making Work Pay Tax Credit means smaller refunds for some taxpayers

When the federal withholding tables were adjusted for Making Work Pay, most taxpayers didn’t adjust their withholding. Although the IRS says the vast majority of workers withheld enough during 2009 and can still expect a refund, some may have had too little tax withheld, especially:

Married couples with two incomes
Individuals with multiple jobs
Pensioners
Dependents
Some Social Security recipients who work
Workers without valid Social Security numbers

As a result, these groups may receive smaller refunds or owe a small balance of taxes for 2009. If you happen to owe taxes because too little was withheld during 2009, the IRS may waive any estimated tax penalty if it relates to changes made to withholding tables.

Why the Making Work Pay tax credit has delayed some tax refunds

The same tax act that included the Making Work Pay credit included two provisions that reduce the credit amount.

Retirees, disabled individuals and Supplemental Security Income recipients receiving benefits from the Social Security Administration, disabled veterans receiving benefits from the Department of Veterans Affairs and those receiving benefits from the Railroad Retirement Board received a one-time economic recovery payment of $250 in 2009.

Government retirees who don’t receive social security can claim a one-time $250 refundable credit on their 2009 federal tax return.

Economic recovery payment and Government Retiree Credit amounts must be subtracted from any Making Work Pay credit amount. Many taxpayers have failed to do so, resulting in rejected returns and delayed refunds.

For example, if you’re eligible for both the Making Work Pay and Government Retiree credits, your $250 Government Retiree Credit will be subtracted from the $400 Making Work Pay amount. You’d still receive the full $400 through two credits, with $150 coming from the Making Work Pay credit and $250 coming from the Government Retiree Credit.

Get the Making Work Pay tax credit right on your 2009 tax return

If you’re uncertain whether you received the $250 Economic Recovery Payment, verify that information before doing your taxes. Contact the Social Security Administration, Department of Veterans Affairs or Railroad Retirement Board.

Taxpayers filing Form 1040 or 1040A should figure the Making Work Pay Credit amount using Schedule M. If filing Form 1040-EZ, use the worksheet for Line 8 to figure the credit.

Because the credit also applies for 2010, adjust your federal withholding if necessary through Form W-4, Withholding Allowance Certificate. Married couples filing jointly and individuals with multiple jobs should complete the W-4 dual earner worksheet.

Since the credit is being spread out over 12 months rather than nine months, your 2010 paychecks will likely be a few dollars less than last year’s. However, you’ll still receive the full credit amount you’re due.

For all details of the Making Work Pay credit, visit the IRS Web site, www.irs.gov. File your income tax return online with #1 rated TurboTax. Start Now!

– Article Courtesy of ARAcontent

5 Small Business Tax Tips

Joel — Fri, 05 Feb 2010 14:08:33 +0000

Small business owners usually find thinking about taxes just as fun as paying taxes but one thing that we can all appreciate is saving some money on taxes.

Here are 5 tax tips for small businesses that can hopefully help you to do some smart tax planning for your business.

#1 Get Organized

Yes, this tip is somewhat broad and not directly related to paying taxes because after all there is nothing in the tax code that will give you a tax deduction for being organized (although there are requirements for record keeping). That being said, you can save yourself a lot of the hassle that is usually associated with tax time if you do things like use QuickBooks Online or let your business credit card act as an online record keeper because of the availability of online credit card statements. The more ways that you can automate your record keeping and retrieval of records then the better shape you will be in when it comes to get your business tax information together.

#2 Revisit Business Structure

There are different tax advantages (and disadvantages) to each of the various business structures. Even if you have been a C Corporation or an S Corporation for many years it may be wise to spend some time with your CPA or other tax professional and re-evaluate whether your business is in the most tax efficient form of business entity.

It is not uncommon for a seasoned tax adviser to recommend that a new business start out as one type of entity for the first year or two and then re-characterize themselves as another form of entity altogether so that the owners of the business can take full advantage of the various tax benefits available to them in different business formations.

For example, calculations involving owner’s basis, loss carryovers, and initial loans for startup expenses may be handled differently from C Corporations to S Corporations so making the change from one to another after a year or so can be a smart idea in some situations.

#3 Find Tax Friendly Workers

There are certain tax benefits inherent with certain classifications of employee or independent contractor that you pay to help your business. One example is that if a small business hires a family member then they may not have to pay Federal unemployment taxes.

Likewise, if you hire your children to work for you then you may not have to withhold income taxes and Social Security from their paychecks. Then of course, there is the classic debate about hiring an employee vs. hiring an independent contractor.

Many employers prefer to hire independent contractors because then they are not required to take out any withholdings, adhere to strict labor laws, pay time and a half, pay close attention to the state tax code, etc. but just be forewarned that you should avoid attempting to characterize someone as an independent contractor if they are really your employee or you will face the wrath of the IRS.

#4 Contribute to a Retirement Plan

Many small business owners are so wrapped up in managing their business that they neglect the very important issue of saving for their retirement. Saving for retirement is not only an important thing to do but also a great way to save some money on taxes. From 401k’s to IRA’s to SEP’s to SIMPLE’s to Keogh Plans to any other number of different small business retirement plan options each and every one of them has certain Federal government sanctioned tax benefits that every savvy small business owner should look into.

#5 Take the Section 179 Deduction

Your business may be eligible to lower your taxable base by electing to take the Section 179 deduction. The Section 179 deduction essentially works to allow businesses to fully expense in the current year certain things that ordinarily would be required to be slowly depreciated over time (meaning that the faster one can expense an item then the lower the taxable base and the lower the taxes due). Additionally, the recently enacted American Recovery and Investment Act of 2009 increases the allowable Section 179 deduction amount which makes this deduction even more attractive to qualified small businesses.

Disclaimer: This advice is not to be considered tax advice or tax guidance for any specific situation. Readers are encouraged to consult their own CPA’s or other tax professionals for tax advice specific to their needs.

About the Author: Joel Ohman is a CFP® and the owner of a credit card comparison website. He is a fan of RateNerd ever since following us on Twitter and encourages you to follow RateNerd on Twitter as well!