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Many of these are general taxtips rather than comprehensive details. These tips may help direct you to the proper tax topic to learn more specific information.One of the easiest way to lower your taxable income? If you have a 401k plan with your employer, put away as much as you can afford. Even better if your employer matches some of your contribution. It's not counted as taxable income until you take a distribution. The idea is while you are in a higher tax bracket, stock the money away until you retire and fall into a lower tax bracket. (Even if you won't be in a lower bracket, at least you're deferring the tax).
Don't wait until December 31 to start figuring how to save money. [2007 maximum contribution: $15,500, $20,000 if 50 years/older].
Not everyone has enough itemized deductions, and there are a couple categories that you have to exceed a threshold to even start counting dollar one: for example, medical expenses must exceed 7.5% of your adjusted gross income to start counting.
But remember all your senses: eye doctors, contacts, eye solution, glasses, prescription sunglasses... dentist and prescriptions for that root canal, (no, not tootpaste)...surgery to correct a genetic or injury defect, but not cosmetic...and also any hearing tests...I SAID ANY HEARING TESTS!
Also claim medical miles (20 cents) and parking for all those medical visits. Long-term care insurance premiums, they count, but there's an annual maximum. Social secuity recipients, remember to add Medicare premiums withheld.
Using your car for business? Or to visit your rental property? With either the standard mileage deduction or actual expenses, you still have to keep track of business miles AND total miles during the year. (You'll need that for the percentage breakdown.)
You cannot deduct the base phone line charge for a home business, even if it's the only 'business' phone you use. The guideline is 'would this still be an expense if I didn't have the business'? So extra services, lines, business calls can count.
The IRS has also ruled on cell phones...same principle. You can't write a percentage because you would have been paying the flat monthly fee just for personal use anyway.
If you have several credit cards, use one exclusively for your business expenses. You can then write off the finance charges and annual fees. Use even a little bit of the card for personal use, lose the deduction: You not allowed to allocate the business percentage of the finance charges and fees.
The educator expense deduction was extended, where qualified teachers could deduct up to $250 of unreimbursed classroom supplies. But you could still deduct additional out-of-pocket expenses if you're itemizing. They would have to exceed 2% of your adjusted gross income to even start counting, also include union dues, recertification exams, conferences and related travel (hotels/meals out of town), pens, papers, dirty looks...well maybe not that one.
Job expenses along with tax preparation fees, investment subscriptions and fees, etc. are in this category too.
Self-employed? It's okay to have a loss your first year or two, but don't think of this as a tax loophole. The IRS expects your business to have a profit in 3 out of 5 years. However, even if things aren't going well, that's only one of the things they would look at. Keep good records, have a business plan, be able to show that your great idea just hasn't caught on yet.
Rule #1: Keep receipts. Rule #2: Keep receipts. You get the picture.
Having a business means you can write off more things than an employee could. See some of the other tax tips.
Being able to deduct a computer at home that you use for work has a lot to do with whether you are an employee or self-employed. As an employee, the computer must be necessary and "for the convenience of the employer," meaning that in order to do your job properly, you need your home computer and it's not just your decision to use it at home. And then, this expense and others must exceed the 2% AGI category on Schedule A to start counting with your other itemized deduction. And if self-employed, you are your employer and can call the shots (i.e., the work-related computer is deductible, and is an expense on Schedule C).
Other expenses in this category? Common are tax preparation fees, safety deposit box, investment magazines, professional journals and memberships, union dues, work clothes (that you couldn't reasonably wear elsewhere), and job search expenses in the same profession. And those job search expenses include long-distance phone calls, airfare, hotel and meals, if you have to scour the country. If local, remember taxicabs count too. Keep receipts of all your other job search expenses as well.
Home Office -- use it regularly and exclusively to claim the deduction. A space on your coffee table doesn't count. Ask yourself if a stranger, let's say an IRS auditor, were to crawl through the living room window, would he/she be able to see that you had a distinct office in your home? If you're not able to use a complete room, partition off a good size area, something distinctive. And lock that living room window!
Home office expenses for homeowners would include the office area percentage of mortgage interest and real estate tax (or rent for renters), insurance, utilities, and any direct 'fixing up' costs for the office. Generally, if your business has a loss, you can't deduct some home office expenses like depreciation, but they can be carried forward.
Itemizing job related expenses? Remember to include other expenses such as tax preparation fees, safety deposit box, investment magazines, professional journals and memberships, union dues, work clothes (that you couldn't reasonably wear elsewhere), and job search expenses in the same profession. And those job search expenses include long-distance phone calls, airfare, hotel and meals, if you have to scour the country. If local, remember taxicabs count too. Keep receipts of all your other job search expenses as well.
Prepare for tax time throughout the year by saving and organizing receipts; don't wait until December 31st! It's easy to forget about the small things that add up: United Way payroll deductions, annual fundraising donations to your school or charities, public television, etc. Donating clothes and furniture? Get a receipt. Donating a car? It's the fair market value, not how much you paid for it, that counts. And now, if the FMV of the vehicle is $500 or more, and the charity then resells it, you're limited to the sale proceeds for your deduction. The charity will notify you with all the information.
Self-employed taxpayers can open a SEP-IRA to lower your taxable income. The maximum amount is 25% of your net self-employment minus any deduction (ie, tax adjustment) for health insurance and self-employment tax, up to $45,000. If your business is going well, that's a nice way to lower your tax and save for the future, but it won't lower your self-employment tax.
Dividends and capital gain distributions? Even if you reinvest the amounts, they are taxable as if you received them and used them to buy more shares. But remember your basis (invested amount) increases. You'll realize less taxable gain when it comes time to sell. Don't fully rely on your brokerage company to keep 'tax-ready' summaries. Their customer support services are not all created equally! And starting in 2008, these investments will not be taxed for those in the lowest two (15%/10%) brackets.
Qualified dividends receive a lower tax rate. These are dividends on investments you own for at least 60 days during the qualified period (60 days before/60 days after the ex-dividend date. (So what is an ex-dividend date? That's the date AFTER, on which a stockholder will be entitled to the dividend. Buy on the ex-dividend or after, you don't get the dividend; sell before the ex-dividend date, you don't get it.) So if you're an active trader, consider selling the stock after you've own it 60 days during this window, otherwise your dividends will be taxed at your regular rate.
Mutual funds? You can use the average cost basis, with either single or double (short and long term) categories. Add up all the shares and the price paid for them. Remember to include any reinvested dividends/capital gain distributions and those resulting shares purchased, to calculate your basis. Divide the cost by the number of shares to calculate your average cost basis, then multiply the average basis by the number of shares sold to figure your total basis in the sale, compare against the proceeds for a gain or loss. And subtract the number of shares and calculated basis from the totals. For the double category, you must keep track of both short and long term totals, following the procedure for both categories, Additionally you must make an adjusment by moving short-term into the long-term category after holding a year. Keep up-to-date records!
Want to negate some of that capital gain tax? Since you net all your profits and losses together at the end of the year, sell an investment that's a loser which you don't think will recover. Want to hedge your decision? Buy that investment back after 29 days (within 30 days it's a wash sale, and you can't take your loss: it's postponed until you sell the new purchase). Then if the investment suddenly takes off, you can still be a genius.
Out of town for business? If you're not reimbursed, remember to deduct the travel and hotel of course, but also taxi fare to and from locations, tips to the driver, concierge, etc., laundry, long-distance phone calls, and your meals. This is one situation where you can deduct food, even sitting at that single table by the kitchen. The deduction for meal expenses are limited to 50% of either your actual receipts or a per diem (if the per diem is more than your actual expense).
Divorce legal fees are not deductible, unless there is a clearly specified charge that was for advice/planning on how the divorce will affect your tax situation. Alimony paid is deductible; alimony received is taxable. Child support is not. However, if you are late with child support, your alimony payment will be considered as child support, ie, can't deduct your alimony if the child support is unpaid.
Receiving a gift or an inheritance? A gift takes on the basis of the giver, whereas an inheritance has the basis of the fair market value at the time of death (or 6 months after). If you are to receive property that you plan on selling, more advantageous to receive it as an inheritance and have a stepped-up basis in it, to decrease the possibility of taxable gain.
As an employee, if your job takes you to many clients or work sites, that's deductible transportation. If you're assigned to a temporary work location lasting less than a few weeks, that's deductible transportation. Burning the midnight oil? Traveling from work to night school before going home, or even if a short furlough from work to attend classes, that's deductible. But commuting: going from home to your regular work and then home again, that's not deductible.
As tempting as it might be, avoid taking an early distribution of your pension when you leave your former job (quit? Sure, whatever you say). There's a 10% penalty in addition to the tax unless you are 55+, disabled, or using it for excess medical expenses, for example. But then again, you might have to buy groceries at the Rock and the Hard Place.
Another two items of note: The age requirement to avoid the penalty is 55+ if you separate from service, but if still employed you need to be 59 1/2. And the exception on $10,000 early withdrawal for a first-time home purchase only applies to an IRA, not your employer plan.
If deciding between making a contribution to a traditional or Roth IRA, check to see if you are covered by a pension plan. Merely by being eligible for your employer's plan, there are phaseouts for traditional IRA deductibility (see the adjustments page). You could still contribute; it just wouldn't be deductible.
Also, there are income restrictions on being able to contribute to a Roth: $96-$114K (individual), $156-$166K (MFJ), 0-$10K (MFS if living with spouse). If you made an ineligible Roth contribution, you should withdraw it or recharacterize it to a traditional. The penalty if you don't: 6% of the excess contribution...ouch!
Homeowners may want to consider paying off credit card balances with a home equity loan. Mortgage interest and equity interest are deductible, whereas personal interest is not. (Equity interest on a loan up to $100,000 ($50,000 MFS) is deductible).
Margin interest is deductible, if you are itemizing. So is investment literature, safety deposit box, tax preparation, but these last three, along with other job expenses, have to exceed 2% of your adjusted gross income to start counting. You can only deduct margin interest up to the amount of investment income, the remainder is carried forward.
Generally you have three years to amend a return. (Technically it is the later of 3 years from the filing deadline or 2 years from when you paid the tax due).
Self-employed taxpayers can deduct the cost of property being placed in service: a certain rate over a certain period of years, this is called depreciation. However, if 40% or more of the value of the new property occurred in the last 3 months of the year, a different calculation is required, resulting in a lower amount to deduct up front. To avoid this, you can expense (section 179: subtract immediately) purchases in those last 3 months. Why? Any expensed property isn't counted for this 40% rule, so this will shift the percentage of all the other new property purchased to earlier in the year. Got that?
You cannot claim your cat or dog as a dependent. Even if Furball or Rover has a social security number.
But now there are two categories of dependents: qualifying child and qualifying relative. Some effects: You no longer have to provide most of the support to claim a QC as a dependent. In order to file as Head of Household, you need to have a dependent (except for divorce waiver). Better read the 2005 Tax Twists to understand it, or to be more confused!
The country is filled with invisible warehouses of alleged clothing donations. But when you really do make a donation, get a receipt, just in case. If your non cash-or-check donations are over $500, the IRS wants a little more info: contribution date/donation address/original purchase amount/etc.
In 2005, there were tighter restrictions on car/boat donations. Starting in 2007, noncash donations over $500 will require an appraisal form to be attached to the return.
For the 2007 tax year only, you can deduct mortgage insurance premiums on a new mortgage.
If you were unfairly treated as an independent contractor and are faced with paying the full 15.3% self-employment tax, there is an alternative. The IRS lists about 10 tests which determine whether one is an employee or independent; it has to do with who controls the time worked, how the job is to be done, if you bring your own expertise, whether you also do this work for others, etc. If you decide to challenge the characterization placed on you, report only your share (7.65%) of the social security/medicare tax on Form 4137. The IRS may call upon your (former?) employer for the rest of it, and they may call you too.
Have a summer home? You can rent it out tax-free! As long as it is under 15 days; you don't have to report the income. But 15 days or more, then it's personal rental income, and complications follow. (This applies to your primary home as well, and you can put your guests in the basement if you really don't like them).
The proper method to prepare your taxes: Sharpen five No.2 pencils. Put on a hot (not cold) pot of coffee. Download every conceivable tax form ever created, in triplicate. Print out these forms and stack in a counterclockwise method depending on the phase of the moon. Pick through your neighbor's garbage and gather all the grocery receipts you find. To every stranger you meet on the street, say 'Deduct this, pal!' Stare at your collection of tax papers and hum loudly. Wait for a miracle.
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