Overlooked Deductions: 2011 Edition

2010 was a whiplash year for tax changes, from sweeping legislation to the will-they-won’t-they buzzer-beater debate on the Bush Tax Cuts extension. All those changes mean more confusion than ever. So, enjoy the updated overlooked tax deductions for the 2011 filing season.

1. Mortgage Insurance Premiums

Although most people remember to deduct mortgage interest they paid, many forget that mortgage insurance premiums are also deductible. In order to qualify, the policy must be for a debt used to purchase a first or second home. This deduction was due to expire at the end of last year, but was extended through 2011 as part of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.

2. Out-of-Pocket Educator Expenses

Another tax benefit that was extended at the last minute is the deduction available to teachers and educators who make out-of-pocket expenses, up to $250. You can read more about this deduction in this blog entry I posted earlier in the year.

3. Unreimbursed Job Expenses

If you have to make a purchase for work, you may qualify to deduct those expenses on your tax return. However, the IRS considers only specific expenses allowable, and they must be considered ordinary and necessary. To find out more about this deduction read this article on the RDTC Tax Help Blog.

4. Student Loan Interest

If you paid interest on a student loan for your own, your spouse’s or your dependent’s education, you may be able to deduct up to $2,500 worth of interest. This deduction is considered above-the-line, so you can claim it even if you do not itemize. Just keep in mind that there are strict income limits for this deduction in 2011.If you make more than $75,000 for single filers or $150,000 for married couples filing jointly, you may not be able to claim it.

5. State Tax Deduction

Remember that you can deduct your state income or sales taxes on your federal return. The deduction has been extended through 2011, so be sure to keep track of all state and local taxes you pay. To determine if you should claim your income or sales taxes paid you can use this calculator at IRS.gov.

6. Qualifying Legal Fees

Most fees paid to an attorney are not considered deductible. However, there are a few exceptions such as fees paid to an attorney related to a class action suit, estate tax advice, and alimony collection expenses paid to a lawyer. However, the deduction is subject to the 2% miscellaneous deduction limit.

7. Alimony Payments

Speaking of alimony, if you are required to make alimony payments, you may be able to deduct them on your tax return. You will need to file an itemized return, and must meet a few IRS qualifications. For more information, you can find details about the deduction in this article on the RDTC Tax Help Blog.

8. Business Tax Deductions

If you run a business, there are plenty of deductions you should look out for to reduce your tax liability. Including but not limited to: advertising and promotion costs, license and registration fees, legal and professional fees, Internet-related expenses, wining and dining clients, etc. For more information check out this article I wrote for WomenEntrepreneur.com on 10 tax deductions you can't afford to miss!

Taxpayers Anxiously Await Annual 'Patch' to Alternative Minimum Tax

From FOX News.com:

Of all the tax issues facing Congress when it returns for a lame duck session after the Nov. 2 midterm elections, the annual rite of patching the Alternative Minimum Tax will be the most urgent.

Unlike the debate over the Bush tax cuts, which will affect taxpayers' income in 2011, the AMT applies to 2010. And the delay in patching it is already causing problems and raising alarms for large numbers of middle-income taxpayers -- as many as 25 million Americans, according to one expert -- who could face a huge increase in their tax payments if Congress doesn't act.

Enacted in 1969, the Alternative Minimum Tax was originally aimed at 155 extremely wealthy taxpayers who had avoided paying federal taxes completely. It was an add-on tax designed to ensure that everyone paid some income tax every year. Since then it has evolved into the primary tax mechanism for taxing high income taxpayers.

Under the original system, taxpayers who earned more than $200,000 -- a very high income 30 years ago -- were required to calculate their taxes differently, resulting in a larger tax payment for the wealthy.

But unlike most other income tax rates, the AMT was never indexed to inflation, and since 1982 the AMT has become a parallel tax system and a critical element in funding the government. It covered more than 4 million high-income taxpayers in 2009, according to the Congressional Budget Office.

IRS Issues Guidance on Expanded Adoption Credit Available for Tax-Year 2010

Earlier today the IRS published a new press release with guidance on the expanded adoption credit for the 2010 tax year, which was included in the Affordable Care Act. The IRS also released a draft version of the form that eligible taxpayers will use to claim the newly expanded adoption credit on 2010 tax returns filed next year.

The Affordable Care Act raises the maximum adoption credit to $13,170 per child, up from $12,150 in 2009. It also makes the credit refundable, meaning that eligible taxpayers can get it even if they owe no tax for that year. In general, the credit is based on the reasonable and necessary expenses related to a legal adoption, including adoption fees, court costs, attorney’s fees and travel expenses. Income limits and other special rules apply.

In addition to filling out Form 8839, Qualified Adoption Expenses, eligible taxpayers must include with their 2010 tax returns one or more adoption-related documents, detailed in the guidance issued today.

The documentation requirements, designed to ensure that taxpayers properly claim the credit, mean that taxpayers claiming the credit will have to file paper tax returns. Normally, it takes six to eight weeks to get a refund claimed on a complete and accurate paper return where all required documents are attached. The IRS encourages taxpayers to use direct deposit to speed their refund.

Taxpayers claiming the credit will still be able to use IRS Free File to prepare their returns, but the returns must be printed out and sent to the IRS, along with all required documentation.

Carbon Tax: The French Connection

Last week, European finance expert Éloi Laurent published a new paper on the new French carbon tax (Carbon Tax: The French Connection, The Economists' Voice: Vol. 6 : Iss. 13, Article 2 {2009}). You can find the abstract from his article below via Tax Prof, or download the full PDF by clicking here.

In early 2010, France will introduce a carbon tax, becoming the largest economy in the world to do so. According to Éloi Laurent, the introduction of a carbon tax in France is a good example that ecologically efficient and socially fair solutions do exist to curb climate change, but that it takes public pedagogy, sound economic reasoning and above all political courage to bring them into being.

Roth 2010: Should You Convert?

Last week I posted this entry discussing changes to IRA’s in 2010. A few days later an associate of mine sent me a link to this article on NCPA.org taking a more detailed look at who would benefit from a Roth IRA conversion. Like any major financial decision, converting your IRA is a big step and you should probably talk to a financial advisor before making the conversion.

Who Would Benefit from a Roth IRA Conversion?

Ostensibly, the benefit of conversion is that the taxes are paid today at a known rate, instead of in the future at an unknown and possibly higher rate. But deciding whether to convert a traditional IRA to a Roth IRA depends largely on the ability to pay the taxes that are due when the conversion takes place. For 2010 conversions, individuals have two years to pay the income tax due. A Roth IRA conversion is ideal for anyone who:

Can pay the taxes using money from nonretirement funds.

Expects that their federal income tax rate when they retire will be much higher than it is today - because their income will be higher and the burden of government will be higher.

Faces little to no federal income tax burden today - so that a conversion would cost very little to complete.

Taxes on a Roth Conversion.

Suppose you convert a traditional IRA to a Roth but take a distribution from the traditional IRA account in order to pay the taxes. Is it worth it? That depends on your current marginal tax rate, income level and how many years you are from retirement. Consider that a distribution from the IRA to pay taxes on the conversion is subject to a 10 percent penalty in addition to federal income taxes if you have not reached 59-and-one-half years.

With these considerations in mind, the table shows the cost of converting $25,000 from a traditional IRA to a Roth IRA and using money from the account to pay the taxes.

Save on Your Taxes with New IRA Rules

With new rules on IRA’s, there are even more ways for you to reduce your tax liability. MainStreet.com published an article on how you can take advantage of these new laws to legally lower your tax bill. I’ve included a section of their post below, but the entire story can be read here.

A change in tax rules, which will allow savers at any income level to take advantage of Roth IRAs, could mean a lower tax bill for you come January.

Currently, retirement savers who make more than $120,000 including certain deductions can't convert their funds to a potentially tax-advantaged Roth IRA. Traditional IRAs and 401(k) funds are taxed on their way out (when you take a distribution), while Roth IRAs are funded on the way in, with after-tax money. The distributions are then tax-free.

As of January 2010, the income cap preventing those with a modified adjusted gross income of more than $120,000 a year (or $176,000 or more if you’re married and filing jointly) from converting their retirement savings to a Roth IRA will be lifted, according to a report in The Wall Street Journal.

Tax Planning for 2009 - How to Benefit from Recent Tax Law Changes

With a new president in charge, and the economy in a full recession, there are lots of changes being made to the US tax code. It can be confusing trying to deconstruct some of these changes. It is even more difficult to figure out which ones will benefit you. To help the readers of my blog plan for the 2009 tax year, I have broken down some of the recent tax law changes.

Make Work Pay

There are a lot of misconceptions going around regarding the new Making Work Pay credit. In order to benefit fully, it is important to understand how you can take advantage of the credit. The most common myth is that the credit will be delivered to qualifying taxpayers through the mail, similarly to the stimulus check last year. However, it is actually distributed through a taxpayer’s check in the form of a reduced tax rate. Because of this, it is your job to check you paychecks and make sure the amount is being added (note that you may need to adjust your withholding to reflect the change).

The First Time Homebuyer Credit

A lot of people are talking about the federal government’s credit for people to purchase a home in the 2009 tax year. However, it is important to remember that the credit is only available to first time homebuyers. To be more specific, the IRS defines a new homebuyer as a person who has not owned a principal residence during the three-year period prior to the purchase. The IRS also specifies that you need to purchase the home between January 1 to December 31, 2009. For more information, check out the IRS’ press release titled “First-Time Homebuyers Have Several Options to Maximize New Tax Credit.”

Energy Conservation Credit

For those of you hoping to upgrade some of your appliances this year, the IRS is giving you even more incentive to go “green.” If you make an energy efficient upgrade to your home—such as installing double-paned windows or buying an approved washer and dryer—you can take a deduction for up to $1,500. However, you must divide the deduction between the 2009 and 2010 tax years, so you will only be able to claim $750 this year. Please note that according to EnergyStar.gov, “geothermal heat pumps, solar water heaters, solar panels, fuel cells, and small wind energy systems... are not subject to this cap.”

Automobile Breaks

Although many hybrid vehicle tax credits are beginning to expire, there are plenty of new ones being announced. The IRS just released new information on the new tax credits being made possible by the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009. The credits apply to low speed electric vehicles, as well as cars with at least four wheels that draw propulsion using a rechargeable battery. Depending on the height and weight of the vehicle the value of the credit can range from $2,500 to $15,000.

Flood Victims

The IRS unveiled some new tax law changes to assist flood victims this year. One big win for flood victims was the removal of some loss limitations. Whereas in 2008, flood victims could only claim a certain amount of losses, now they can deduct the entire amount. However, it is important to remember that this full amount can only claimed by taxpayers who itemize their deductions. Another less popular tax law change affects individuals who helped victims displaced from their homes. According to the IRS these charitable taxpayers can claim an additional exemption of $500 for each displaced individual they help, with a maximum of $2,000.

Unemployment

With more and more Americans losing their jobs, changes have also been made to the way unemployment benefits are taxed. The key to benefiting from these new changes is by knowing exactly what you are entitled to. According to the newest changes to the tax law, the first $2,400 worth of unemployment benefits is income tax free. Therefore, you could expect an increase on each check you receive by around $25. Additionally, 20 more days have been added to the duration of unemployment.

The American Opportunity Tax Credit

Thousands of students have already applied for this credit, but unfortunately many taxpayers do not fully understand it. As opposed to the old Hope Credit, the new tax credit can be claimed for up to 4 years. However, in order to qualify, a student’s parents cannot make over $80,000 ($160,000 for joint filers). The student must be also taking at least half a load of courses, and have no record of felony drug charges. For more information, check out this entry I posted breaking down the American Opportunity Tax Credit back in March.