Tag Archives: Income Tax

The 5 Most Popular Tax Deductions

Income Tax Deductions
The 5 Most Popular Tax Deductions

The 5 Most Popular Tax Deductions: Do You Qualify for Them

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Just less than one in three taxpayers claim itemized deductions on their tax returns, with the vast majority choosing instead simply to take the standard deduction, according to the latest available IRS figures, from the 2012 tax year. Yet that still means that more than 46 million returns include itemized-deduction statements, and the figures reveal the several key deductions that more Americans rely on than any other tax breaks available. Let’s take a look at the five most popular tax deductions and whether you can qualify for them.

5. Tax Preparation Fees

More than 21.7 million taxpayers claimed itemized deductions for tax preparation fees. The total deductions claimed totaled up to $7.2 billion, or an average of about $330 per taxpayer.

That number might seem low, especially given how many people need to get tax help. Yet the thing to remember is that your ability to deduct tax preparation fees and other miscellaneous deductions is limited. Unless those deductions add up to more than 2 percent of your adjusted gross income, you can’t deduct a penny — and even if the amount is greater, you can only deduct whatever the excess is over that 2 percent figure. As a result, despite its popularity, many people who pay for tax preparation find themselves unable to take advantage of this deduction.

4. Home Mortgage Interest

One of the most important deductions available to homeowners is the mortgage interest deduction, which allows you to write off the interest portion of your mortgage payments on your tax return. More than 34.3 million taxpayers reported mortgage interest on which their lenders had provided information, and another 1.2 million deducted interest despite having no documentation from their lenders. The total amount claimed was the highest of any deduction, with taxpayers writing off more than $326 billion.

Interestingly, that figure comes even as mortgage rates remain near record lows. In past years, when mortgage rates were higher, the mortgage interest deduction was an even more important part of reducing your tax liability. Some have called for a limit to the mortgage interest deduction, but given the policy interest in encouraging homeownership, it would take draconian measures to get rid of this highly popular deduction.

3. Gifts to Charity

Americans are well known for their charitable giving, and more than 37.3 million taxpayers deducted a total of nearly $200 billion. More than 90 percent of the taxpayers who claimed charitable deductions listed cash gifts, while 60 percent made gifts other than by cash or check, which includes donations of things like clothes or vehicles. Gifts of cash and checks made up about three-quarters of the total value of the charitable donations, but that still leaves a substantial amount for non-cash gifts. Many nonprofit organizations rely on the tax breaks from charitable giving to spur donations, and that makes it a popular tax break not just for taxpayers but also for charities as well.

2. Property Taxes on Real Estate

Moving back to homeowners, not every property has a mortgage, but just about every piece of real estate carries taxes. That led 39.2 million taxpayers to deduct their real-estate taxes, with total deductions amounting to $173.3 billion.

Taxpayers are allowed to deduct real estate taxes on any property owned, including not only your primary residence but also vacation homes and even open land in your possession. Note that your deduction is based on the amount you actually pay in any given year, so in some cases, paying taxes earlier than they’re due can actually boost your deductions in one year at the expense of reducing them in other years. That strategy can help you take advantage of the standard deduction and boost your overall write-offs half the time.

1. State and Local Income and Sales Taxes

The most-often-taken deduction is for state and local income and sales taxes. About 43.9 million taxpayers, or 95 percent of all those who file for itemized deductions, took this deduction, amounting to a total of nearly $300 billion.

Historically, taxpayers used to be able to deduct only state and local income taxes. But in part due to the efforts of lawmakers in states that impose no income tax, the rules changed to allow taxpayers to choose to deduct sales taxes instead of income tax. Still, even though a quarter of all returns claim sales tax deductions, the amounts involved heavily favor the income-tax side, with total deducted amounts of $283 billion for state and local income taxes versus just $16.5 billion for sales taxes.

IRS Aims Harder to Protect You Against Identity Theft

Protect against Identity Theft
IRS doing more to protect your ID

WASHINGTON — A notice from the Internal Revenue Service saying your return won’t be accepted might be your first clue that your identity has been stolen.

http://www.dailyfinance.com/2015/01/20/irs-targets-identity-theft/

“The IRS recognizes the first return submitted under a Social Security number, and usually the identity theft is identified when the second return is filed” under that same number, said Mark Luscombe, principal federal tax analyst for Wolters Kluwer Tax & Accounting, US.

Another clue might be an IRS notice saying you have unreported income. That could happen if someone steals your Social Security number and gives it to an employer to avoid being taxed on earned wages. You get the tax bill instead.

Identity theft could lead to long delays in getting your refund or bigger tax bills for unreported income. “Tax refund fraud associated with identity theft continues to be an evolving threat, one that imposes a serious financial and emotional toll on honest taxpayers and threatens the integrity of the tax administration system,” the Government Accountability Office said in a report in August.

236,000 Returns Linked to Identity Theft in 2014

More than 236,000 tax returns processed last year were deemed fraudulent because of identity theft, and nearly $1.2 billion in refunds from those fraudulent returns were blocked, according to the Treasury Inspector General for Tax Administration. The number of identity-theft returns is down significantly from 2012, and the IG said in a report last fall that new filters the IRS put in place to identify the crime may be responsible.

“The IRS is investing in that area,” said Bob Meighan, vice president of consumer advocacy for TurboTax (INTU). “People have to have confidence that the returns that they file are protected and secure,” he said.

The IRS is providing identity-theft victims with a personal identification number to prove who they are when filing tax returns. In 2014, more than 1.2 million of these identity-protection PINs were issued, up from 770,000 the previous year. The agency also has more than doubled the number of workers assigned to identity theft cases since 2011, to about 3,000 in 2014, according to the GAO.

Beginning this year, the number of refunds direct-deposited to a single account is limited to three, another attempt to reduce identity theft. “The fourth and subsequent refunds automatically will convert to a paper refund check and be mailed to the taxpayer,” the IRS said.

National Taxpayer Advocate Nina Olson wants the agency to do more. She has called identity theft “an invasive crime that can have a traumatic emotional impact.” She said early last year that she has called on the IRS to designate a single point of contact, someone who can provide “sensitive, holistic assistance” to an identity-theft victim.

What You Should Do

Kathy Pickering, executive director of the Tax Institute at H&R Block, says prevention is the best defense. Don’t give out your Social Security number or your date of birth, she says.

The IRS also advises people to protect their personal computers and Internet accounts, check their credit reports and avoid giving out personal information over the phone, especially if you didn’t initiate the call.

And beware of phishing attempts — online or over the phone — that seek access to your personal information. “The IRS does not initiate contact with taxpayers by email to request personal or financial information,” the agency said. “This includes any type of electronic communication, such as text messages and social media channels.”

If you get a notice from the IRS that leads you to believe you are an identity-theft victim, the IRS says you should respond immediately. The first step, the agency says, is to complete and submit an Identity Theft Affadavit, Form 14039 at http://www.irs.gov. If the issue remains unresolved, taxpayers should contact the Identity Protection Specialized Unit at 800-908-4490.

 

Temporary Tax Breaks Extended

College Students
College students, their parents and home owners benefit from extended tax breaks

Temporary Tax Breaks Good for 2014; Future Up to Congress

http://www.dailyfinance.com/2015/01/21/temporary-tax-breaks-extended/

WASHINGTON — Many taxpayers can rest easier knowing that Congress extended a series of tax breaks for individuals and businesses before adjourning in December.

But the effects will be short-lived. The extension only lasted until the end of 2014. The new Congress that took office Jan. 6 will have to decide once again whether to renew them. Going forward, the tax breaks may not be around. “Don’t rely on them,” said Mark Luscombe, principal tax analyst for Wolters Kluwer Tax & Accounting US.

Credits and Deductions

For the 2014 tax year, Kathy Pickering, executive director of the Tax Institute at H&R Block (HRB), estimates that one in six taxpayers will be affected by the extenders. They include college students and their parents; homeowners; residents of states without income tax, and more. Those who qualify could see larger refunds, or a smaller tax bill. Credits directly reduce the amount of taxes owed. Deductions reduce the income on which taxes are computed.

For individuals, the tax extenders are linked to expenses you’re likely to have, tax break or not, said Bob Meighan, vice president for consumer advocacy at TurboTax (INTU).

Live in a state that doesn’t have an income tax? If you itemize, the congressional extension means you can take a deduction for sales tax.

Are you and your child struggling with the high cost of college? The tax extenders bill passed by Congress includes the $4,000 above-the line deduction for tuition and fees. Above-the-line deductions reduce adjusted gross income, which is used to calculate eligibility for many tax breaks, including the tuition and fees deduction. This is only one of many tax breaks for higher education. Among the others: the lifetime learning credit or the American Opportunity Credit.

“Though income levels differ for each of these three benefits and people should see which one works best, the trend in recent years has heavily been toward the credits,” said Internal Revenue Service spokesman Eric Smith. The extenders also include an above-the-line deduction for schoolteachers in kindergarten through high school who spend their own money on books and supplies for the classroom. They can deduct up to $250 for this expense.

Help for Homeowners

There’s help, too, for homeowners — and those who fell behind on mortgages. Was your house underwater and some of your mortgage debt was forgiven? As a result of the congressional action, that forgiven debt will often not be counted as taxable income. Were you required by your lender to purchase mortgage insurance?  One extender will allow you to deduct the cost of those premiums.  The credit of up to $500 for making environmentally friendly improvements to your home also was renewed for 2014.  Among the things covered: energy-efficient heating or air conditioning, new windows and insulation.

If you’re 70½ or older and required to take a minimum distribution from your retirement accounts, the extenders allowed you to do this tax-free, by rolling it over directly to a charity. But you would have had to do that before Dec. 31 to avoid having the distribution counted as income and taxed as such.

In some previous years, when the tax breaks were extended late in the year, Congress included a special provision that allowed distributions made in January to qualify, the IRS said. There was no such rule this year.

Increasingly, these extenders have only been enacted for a single year. Luscombe says that’s because some in Congress believe they should be discussed as part of “fundamental tax reform.” And that could mean a push for lower individual rates in exchange for giving up some credits and deductions. Politically, that might be difficult for people who are fond of their tax breaks,” he said.

Avoid These 10 Common Filing Mistakes

Tax Mistakes
10 Common Mistakes

http://www.dailyfinance.com/2015/01/21/tax-filing-mistakes-to-avoid/

Tax Hacks 2015 : Avoid These 10 Common Filing Mistakes

It’s time. Your W-2s and 1099s are likely making their way to your mailbox or inbox right now, assuming they haven’t already arrived.

As you start filling in your tax forms, be aware that a mistake can cost you valuable time or money. Money Talks News finance expert Stacy Johnson spoke with Tom Sawyer, a CPA with Sawyer & Latimer in Fort Lauderdale, Florida, to uncover some of the most common tax-time mistakes.

Mistake No. 1: Paying for tax preparation when you could get it for free

The first mistake some people make is paying someone else to do their taxes. Depending on your income level, you may have more than one option when it comes to getting free tax prep services.

  • Volunteer Income Tax Assistance: Sponsored by the IRS, VITA offers free tax preparation by trained volunteers. You may be eligible for the VITA program if your income is $53,000 or less, you have a disability, are elderly or have limited English-speaking ability.
  • Tax Counseling for the Elderly: Also sponsored by the IRS, the TCE program is intended for people age 60 and older.
  • Free File: If your income is less than $60,000, you can use an online software program to prepare and file your federal income tax return for free.

For a list of software providers, head to the Free File website:
http://www.irs.gov/uac/Free-File:-Do-Your-Federal-Taxes-for-Free

If you’d rather have face-to-face assistance, you can find a list of VITA and TCE sites on this IRS Web page:
http://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers

Mistake No. 2: Getting your Social Security numbers wrong

On its list of common tax mistakes, the IRS puts wrong and missing Social Security numbers at the top.

Long gone are the days in which you could claim dependents without a Social Security number. Today, every member of your household listed on your return needs to have one. Make sure to double check all the numbers before submitting your return to ensure there aren’t any transposed or missing digits.

Mistake No. 3: Spelling your name wrong

Sure, you know what your name is, but maybe you’re typing too quickly and hit a wrong key. Or you could be interrupted while filling out the form and pick back up at the wrong spot. There are plenty of scenarios in which people can, and do, misspell their names on their income tax forms. Those simple errors can lead to rejected returns and delayed refunds.

In addition, if you recently married or divorced and haven’t registered a name change with the Social Security Administration, be sure to use your old name. You need the name on your forms to match the name listed in Social Security records.

Mistake No. 4: Making math errors

Fortunately, this becomes less of a problem if you use software to prepare and file your taxes. The computer program will do all the calculations on your behalf, which virtually guarantees you’ll get it right.

However, the computer program can’t know whether the numbers you’ve entered are correct. Double check everything to be sure your return is completely accurate. It should also go without saying that if you’re doing a paper return, use a calculator and do the math twice to confirm the results.

Mistake No. 5: Forgetting your John Hancock

There are two places this mistake can trip you up:

This first is by failing to sign a paper return before mailing it. The second is failing to sign your check if you’re sending in a payment. Either one can result in lengthy delays in processing your return.

You can avoid this mistake by filing and signing your return electronically and having tax payments directly withdrawn from your bank account. Saves on postage, too.

Mistake No. 6: Using the wrong tax form

Most of the mistakes above have the potential to affect how quickly the IRS processes your return and issues your refund. However, they don’t necessarily affect your bottom line. But using the wrong tax form could mean lost dollars.

If you use the 1040EZ form, you get the standard deduction. For most people, in 2014, that amount is $6,200 for singles and $12,400 for couples filing jointly. These deductions are subtracted from your income so you don’t have to pay taxes on those amounts.

However, if you have a mortgage, home office, significant health care expenses or charitable contributions, you may be better off using a regular 1040 form so you can itemize and get a bigger deduction.

Mistake No. 7: Selecting the wrong filing status

Another costly mistake can be selecting the wrong filing status. This mistake may be most common for single parents.

For example, unmarried parents who have a qualifying dependent and pay more than half the cost of keeping a home may be able to file as a head of household, a status that boosts their standard deduction by $2,900. In addition, you can be considered “unmarried” so long as your spouse did not live with you for the last six months of the year.

Meanwhile, widows and widowers can still use the “married filing jointly” status for the year in which their spouse died. Then, if they have dependent children, they may be able to file as a “qualifying widower with dependent child” for two more years, a status that allows the same standard deduction as those who are married and filing jointly.

Mistake No. 8: Missing deductions or credits

It’s not enough to simply use the right form and the right filing status. If you want to maximize your refund, you also need to take advantage of every tax deduction and credit available to you. Fortunately, there are plenty of credits and deductions that have the potential to reduce your taxable liability by thousands.

Here are a few of the bigger credits and deductions you don’t want to miss. You may want to consult with a tax professional to learn more about whether you qualify.

  • American Opportunity Credit: Available to college students of all ages, this credit is based upon college expenses and can provide up to a $2,500 tax reduction per year for four years.
  • Earned Income Tax Credit: Offered to low-income families, this credit is refundable, and that means the government will send you cash even if you don’t owe any taxes. Sometimes this is overlooked when eligible families have incomes so low they aren’t required to file returns, so they miss out on claiming the credit. That can be a costly mistake because the credit can be up to $6,044 for some families.
  • Child Care Credit: If you pay someone else to watch your children while you work, you may be able to claim a credit on up to $1,000 of your expenses. Most eligible taxpayers will get a credit worth 20 percent of that amount, for a total credit of $200.
  • State Income or Sales Tax: You can deduct any state income tax you pay from your federal return. If your state doesn’t charge an income tax, you can use the amount you paid in state sales tax instead.
  • IRA Contributions: While contributions to Roth IRAs aren’t deductible, you can deduct up to $5,500 if you put that money in a traditional IRA. If you’re age 50 or older, the limit is increased to $6,500.

Mistake No. 9: Failing to claim all your income

You might also make the mistake of thinking you don’t need to claim income unless you receive a W-2 or 1099 form for your work. In reality, you need to claim all income for the year regardless of whether someone paid you $20 or $2,000 for a side job.

Here’s what the IRS says (you can read more here: http://www.irs.gov/uac/Reporting-Miscellaneous-Income )

While most people are aware they must include wages, salaries, interest, dividends, tips and commissions as income on their tax returns, many don’t realize that they must also report most other income, such as:

  • Cash earned from side jobs
  • Barter exchanges of goods or services
  • Awards, prizes, contest winnings
  • Gambling proceeds

Cheating the IRS may seem like a victimless crime, but you could be hurting yourself if you ever are audited.

Mistake No. 10: Sending your return through the mail

If you insist on being old school and send your return through the mail, you’re making the last mistake on our list.

Filing through the mail is a mistake for oh, so many reasons. First up, you greatly increase your chances of making one of the other mistakes listed above. There is less chance of missing Social Security numbers, forgetting to sign and making math errors. In addition, a good software program will help you root out all of those deductions and credits you may otherwise miss. It should also guide you to the right filing status.

But more importantly, filing electronically means you could have your refund cash in hand in only a few weeks. In 2014, the IRS processed returns from 27 million taxpayers and deposited $146.3 billion in refunds through direct deposit. If you’re not already e-filing, it’s time to get on this bandwagon. Trust us, it will make tax time a relative breeze.

Parenting and The Marriage Penalty Tax Laws

Federal Income Tax
Income Tax Time

Marriage Penalty: 4 Tax Laws That Hit Couples Harder

http://www.dailyfinance.com/2015/01/13/marriage-penalty-tax-laws-hit-couples-harder/

Getting married involves major financial changes, and the U.S. tax system is one of the most important aspects of marital financial planning. Although some married couples benefit from tying the knot as far as their tax returns are concerned, many couples end up paying more than they would if they remained unmarried and each filed their own tax return.

This phenomenon is known as the marriage penalty, and it rears its ugly head in several parts of the tax laws. Let’s take a look at some of the most common provisions in which married couples get the short end of the tax stick.

1. Two-Earner Couples Pay Higher Taxes Faster

Married couples have to combine their earnings in order to determine their gross income, and the tax brackets that apply to various income levels differ for married couples compared to single filers. For one-earner couples, the higher incomes for the brackets for a particular rate result in a marriage bonus. But for two-earner couples who earn roughly the same amount, the fact that the tax brackets for married filers at the 25 percent rate and above have income limits that less than double those of single filers means that they can end up paying extensive marriage penalties.

2. Standard Deductions Are Higher for Unmarried Parents

The tax bracket situation above gets even worse when kids enter the picture. Tax law allows one of the unmarried parents of a child to claim head of household status, which comes with an additional $2,900 standard deduction compared to singles. That means that unmarried parents can claim a total of $15,300 in standard deductions in 2014, compared to just $12,400 for married couples.

In addition, unmarried individuals have the option of having one parent itemize deductions while the other takes a standard deduction. Married couples, on the other hand, don’t have that option. If one itemizes, the other has to as well — even if that spouse has no itemized deductions at all.

3. New Surtax Rules Have Considerable Marriage Penalties

The Medicare and Net Investment Income surtaxes impose additional income taxes of 0.9 percent and 3.8 percent, respectively, on various types of income. The 0.9 percent Medicare tax applies to earnings above $200,000 for singles and $250,000 for married joint filers, while the 3.8 percent Net Investment Income provision imposes tax on interest, dividend, and other investment income to the extent that it falls above the same $200,000 and $250,000 income limits. Two individuals earning just under $200,000 wouldn’t be subject to the provision at all, but if they married, they’d be well over the threshold and owe substantial amounts of tax.

4. Tax Benefit Phaseouts Can Hurt Couples More Quickly

Many favorable tax provisions have income limits above which their benefits slowly phase out and eventually disappear. In many cases, combining two individuals’ incomes is enough to phase out beneficial tax breaks even if neither one alone would have been a problem.

One example involves the income level at which personal exemptions and itemized deductions begin to phase out. For singles, income above $250,000 triggers provisions to start phasing out those tax breaks, while married joint filers face a $300,000 limit. Again, the simplest example involves two people who each earn $200,000 — alone, neither would have a problem, but together, they’d lose considerable amounts of their exemptions and deductions and thus pay a lot more in tax liability.