Lowering Your Tax Liability

Last week, my YouTube team shot another great tax tips video. The video was uploaded to my YouTube channel yesterday. In this episode, James explains six ways to lower your tax liability in under ten minutes. I have embedded the video below, but be sure to check out my YouTube channel and subscribe to my future videos.

How to Lower your Tax Liability Without Itemizing your Return

In preparing a tax return, you can choose to either itemize your deductions or claim the Standard Deduction. If you decide to itemize, you can use dozens of tax deductions such as the mortgage interest deduction and charitable contributions to reduce your adjusted gross income. However, if you do not qualify for many deductions then you should take advantage of the Standard Deduction, but do not stop there. There are plenty of tactics you can use to lower your tax liability without itemizing.

The Standard Deduction

If you do not itemize your return then you can take what is called “the Standard Deduction,” which is a dollar amount that non-itemizing taxpayers can subtract from their adjusted gross income. There is a set amount for individuals, married couples and taxpayers who claim the head of household filing status—this amount changes every tax year. There are also additional amounts available to persons who are blind and/or are 65 years or older. The standard deduction amounts for the three main filing statuses are listed below.

Single:

2009:$5,700; 2008: $5,450

Married Filing Separately:

2009: $5,700; 2008: $5,450

Married Filing Jointly:

2009: $11,400; 2008: $10,900

Head of household:

2009: $8,350; 2008: $8,000

Property Taxes

There are a handful of tax deductions that can be used to further reduce your adjusted gross income. These “above the line” deductions can be claimed even if you are taking the Standard Deduction. The first of which is the property tax deduction. If you own a house, and have to pay property taxes then you can either deduct the amount of real estate taxes paid during the year or a flat rate ($500 for single taxpayers and $1,000 for married couples filing a joint return). Usually if you owned a home then you would want to itemize since you could claim the home mortgage deduction, however if your deductions are still lower than the Standard Deduction you can still use your property taxes to lower your tax liability.

New Car Sales Tax

If you purchased a new car in 2009 then you can deduct all state and local excise taxes paid on the vehicle, up to $49,500. To qualify, the purchase must have taken placed between February 16^th and December 31^st in the year 2009. To claim the full credit your adjusted gross income also needs to be under $125,000 for single taxpayers and $250,000 for married couples filing a joint return.

Alimony Payments

If you have to make alimony payments as part of a divorce settlement then you can take advantage of the alimony payment deduction even if you do not itemize. The IRS considers alimony payments taxable income to the recipient in the year received, and allows the taxpayer making the payment to deduct the amount paid from their adjusted gross income. Unfortunately non-cash settlements such as property or voluntary payments do not qualify. For more information, including a list of IRS requirements check out this article on the alimony payment deduction at the RDTC Tax Help Blog.

Qualifying Relocation Expenses

If you had to move for a new job opportunity then a portion of the related expenses can be deducted from your income in addition to claiming the Standard Deduction. To qualify your new work location must be at least 50 miles further from your former home than your old job was. Additionally, you must work a full time schedule for at least 39 weeks during the first year after starting the new job.

According to the IRS the following moving related expenses can be deducted:

• Packing and transportation costs for moving household goods
• The cost of shipping goods from a place other than your former home (such as a storage unit)
• Any storage bills, or fees for disconnecting or reconnecting utilities
• All move-related travel expenses (such as mileage, tolls, lodging, parking fees, etc.)
• Expenses of shipping or relocating your car and pets to your new home.

On the other hand, the following expenses cannot be deducted:

• License plates and registration for your car
• Any part of the purchase of a new home, or expenses of leasing a new apartment
• Real estate taxes, or lost security deposits

Obama's Proposal to Limit Itemized Deductions to 28% Rate

From the Tax Professor Blog:

President Obama proposes to fund his health care bill in part by limiting the tax rate at which itemized deductions reduce tax liability to 28%:

The Administration proposes to limit the tax rate at which high-income taxpayers can take itemized deductions to a maximum of 28 percent, affecting only single taxpayers with income over $200,000 and married taxpayers filing a joint return with income over $250,000 (at 2009 levels). The proposed limitation would be effective for taxable years beginning after December 31, 2010.

Questions for the Tax Lady: February 15th, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: In addition to donating to organizations providing relief in Haiti, is there anything else I can do now to lower my 2009 tax liability?

Yes, you can make retroactive payments to a traditional IRA anytime before the April 15^th deadline. Therefore, any contributions can help reduce your 2009 tax liability. For more information, check out this blog entry explaining traditional IRA deductions.

Question #2: Do I need to report income from a rental property on my tax return?

Yes. You will need to report your rental property income on Schedule E of IRS Form 1040. You will need to include all rent payments as part of your gross income—this is line 17 on IRS Form 1040. However, you must also report the following rental property related items as income:

• Advanced rent
• Security deposits
• Lease canceling payments
• Property or services received
• Other expenses paid by tenants

10 Ways to Reduce your Tax Liability in Under 10 Minutes

Last week the RDTC Tax Help Blog posted a helpful article for anyone looking to lower their taxable income before the end of the year. In addition to the standard end of the year tax tips, the blog even provides links to charities that accept donations online, and banks that will allow you to setup college saving funds online. I have included a few tips below, but be sure to check out the full article here.

Electronic Mortgage Payments

If you can make your mortgage payment online, then you might want to make an extra mortgage payment before the end of the year. Since the IRS allows you to deduct all mortgage interest, this could significantly lower your taxable income for the year. However, if you make the payment close to the end of the year then you will want to be sure and double check the 1098 Form you receive from your lender to ensure it includes the last minute payment.

Make State and Local Tax Payments

The IRS allows you to deduct all taxes paid to state and local governments. If you know that you are going to owe, then you might want to consider making an estimated payment before the end of the year. Check out your local tax agency’s website to see if they accept payments online, or they might have a phone number that you can call to make a payment with your credit card.

Order Energy Efficient Home Upgrades

The IRS offers a credit of 30% of the cost of qualified energy efficient home upgrades, up to $1,500. Although the credit applies to upgrades such as roofs and insulation, certain water heaters, windows, doors, and air conditioning units qualify as well. If you are in need of any of the aforementioned products then you could make your purchase from Lowes.com or HomeDepot.com in a matter of minutes. However, before you pull out your credit card be sure to check out this page on EnergyStar.gov explaining the Federal tax credit.

Splurge on Office Supplies and Furniture

If you are a small business owner and have an office or store for your business, then you can greatly reduce your taxable income within a few minutes by splurging on new office supplies and furniture. There are lots of great office furniture websites, and some that will even deliver and setup the furniture for you. In just a few minutes, you could easily reduce your tax liability by thousands of dollars.

Continued at RDTC.com…

1/3 of Tax Returns Filed Pay Zero Tax

According to the Tax Foundation “46.6 million people who filed tax returns in 2007 had a zero or negative tax liability -- 32.6% of the 143.0 million tax returns filed. In about half of these cases, substantial additional money was ‘refunded’ to the tax filer. 15 million people do not earn enough to file a tax return, so 61.6 million people do not pay federal income taxes.”

The Tax Prof Blog posted the following video when covering this story of a FOX News segment with Jim Angle discussing this disturbing figure. You can check out the embedded video below.

Time Warner's Well-Timed Tax Break

From the WashingtonPost.com:

You don't often get to use "Time Warner" and "hot stock" in the same sentence, given the company's horrible investment performance over the years.

But Time Warner's pending deal to unburden itself of AOL by dumping the ailing firm onto its shareholders is one of those times, thanks to an insight I got from tax guru Bob Willens of Robert Willens LLC. Willens, who lives and breathes (and probably dreams about) the tax code, says that Time Warner's plan to distribute AOL stock to its shareholders in a tax-free transaction is benefiting from a little-noticed change last year in the rules governing "hot stocks."

In this case, "hot stock" doesn't mean shares with a rapidly rising price; it means shares that can trigger a tax liability.

The "hot stock" here would be Google's 5 percent stake in AOL. Time Warner sold those shares to Google in 2005, and plans to buy them back by the end of this year, then distribute them (along with the other 95 percent of AOL) to Time Warner shareholders in a tax-free deal.

Without last year's change, Willens says, the Google stake in AOL would have been a "hot stock" to both Time Warner and its shareholders because Time Warner would have been distributing the stock to its holders within five years after buying it from Google.

How much in tax savings are we talking about? Call it $200 million or so. The exact amount depends on the market value of AOL stock when Time Warner distributes it. Should AOL be valued at $5.5 billion, the value that Google placed on AOL in February, the "hot stock" rule change would save Time Warner and its shareholders from having to report $275 million each in taxable income. (I'm assuming that Time Warner's cost of AOL for tax purposes is close to zero.) At federal, state and local tax rates totaling 40 percent, Time Warner and its shareholders each save about $110 million.

Willens says the "hot stock" rule was changed last December when the Treasury tweaked the appropriate regulations. A Time Warner spokesman said the company played no role in the change. Spokesmen for the Treasury and Google declined to comment.

Under the previous rules, there would have been a "hot stock" liability because Google decided to invoke its right under the AOL stock-purchase agreement to sell back its AOL stake to Time Warner. The price is currently being negotiated.

I suspect that taxes play a big role in Google's decision to sell. If Google, which paid $1 billion for its AOL stake, sells the stake for the $274 million at which it's now carried on its books, it gets a $726 million tax loss. That would reduce its income-tax bill by about $290 million.

Time Warner and its shareholders avoid taxes, perfectly legally, and Google gets to save some taxes, also perfectly legally. All other taxpayers, in effect, pick up the tab for those savings.

'Twas ever thus, when it comes to big-time dealmaking. And 'twill always be thus.

(Full disclosure: many of my Fortune colleagues have stakes in the stock price of Time Warner, our employer. I joined Fortune in 2007 and have a minor, indirect stake in Time Warner's stock price.)

Why Is OfficeMax Paying Taxes Despite Tax Credits in Excess of Tax Liabilities?

Robert Willens of Columbia University has published a new research paper analyzing OfficeMax's Tax Profile. Below is the abstract from the paper, but you can download the full PDF by clicking here, thanks to Tax Prof Blog.

OfficeMax Inc. (OMX) is paying cash taxes each year yet at the same time is reporting a substantial amount of credit forwards that seemingly should operate to offset any tax liability that it might incur. However, that OMX is paying taxes while concurrently possessing tax credits well in excess of its tax liabilities can be explained by the fact that the credits are not the type that can be used to offset the particular tax liabilities it is generating. In short, the anomaly of a corporation paying taxes despite the existence of substantial tax credits can be explained by examining the nature of the credits that it has amassed.

5 Tax Saving Valentines Day Gifts

Valentines Day is known across the country as a day to give gifts to your loved ones (that is 2 weeks from this Thursday, for all you “Forgetful Freds” out there). But this date just so happens to fall in the middle of tax season, when taxpayers across the country have taxes in the mind. But do not be worried, there are a few gifts you can give that might also help you lower your tax liability. So if you had to write a big check to the IRS last year you may want to try one of the following tax saving valentines day gifts.

1. Give Money to a Spouse

If you and your spouse are both American citizens, then you can transfer money directly to your spouse. You will not have to pay any taxes on the transfer and it will actually lower your overall tax liability. However, it will have an adverse effect and raise your spouse’s liability.

2. Setup a Retirement Account

What better way to celebrate Valentines Day than by planning for your future? If you are married you can setup a retirement account for you and your spouse. You can transfer additional funds into this account which will help lower your tax liability.

3. Make a Charitable Contribution

Making a charitable donation in you’re the name of your loved one can be an excellent Valentine’s day gift. It will not only show them you care about charitable causes, but you can also deduct the expense as a charitable contribution. Just be sure keep proof of your contribution!

4. Pay College or Medical Bills

By offering to pay for a loved ones college or medical bills you can help them out while also getting a tax deduction. The IRS allows you to deduct these expenses as long as you mail in the bill yourself so that you have proof.

5. Give a Business Branded Gift

If you own a business you can always purchase some type of product that bears your company logo and write it off as a business expense. This may not seem like the most romantic of gifts, but now days you can have your logo printed on just about anything. Try considering a bathrobe with a small logo on the front, or custom chocolates.