Tax Deductions You Might Not Know You Can Take

Found this cool infographic over on Turbo Tax's blog about the top 10 tax deductions you aren't taking! Check it out and if you have any questions about whether these deductions might be ones you can take, give me a call! 818-368-5374.


by TurboTax Income Tax Software

Five Tax Credits that Can Reduce Your Taxes

From IRS Tax Tip Newsletter 2013-33

Five Tax Credits that Can Reduce Your Taxes

A tax credit reduces the amount of tax you must pay. A refundable tax credit not only reduces the federal tax you owe, but also could result in a refund.

Here are five credits the IRS wants you to consider before filing your 2012 federal income tax return:

1. The Earned Income Tax Credit is a refundable credit for people who work and don’t earn a lot of money. The maximum credit for 2012 returns is $5,891 for workers with three or more children. Eligibility is determined based on earnings, filing status and eligible children. Workers without children may be eligible for a smaller credit. If you worked and earned less than $50,270, use the EITC Assistant tool on IRS.gov to see if you qualify. For more information, see Publication 596, Earned Income Credit.

2. The Child and Dependent Care Credit is for expenses you paid for the care of your qualifying children under age 13, or for a disabled spouse or dependent. The care must enable you to work or look for work. For more information, see Publication 503, Child and Dependent Care Expenses.

3. The Child Tax Credit may apply to you if you have a qualifying child under age 17. The credit may help reduce your federal income tax by up to $1,000 for each qualifying child you claim on your return. You may be required to file the new Schedule 8812, Child Tax Credit, with your tax return to claim the credit. See Publication 972, Child Tax Credit, for more information.

4. The Retirement Savings Contributions Credit (Saver’s Credit) helps low-to-moderate income workers save for retirement. You may qualify if your income is below a certain limit and you contribute to an IRA or a retirement plan at work. The credit is in addition to any other tax savings that apply to retirement plans. For more information, see Publication 590, Individual Retirement Arrangements (IRAs).

5. The American Opportunity Tax Credit helps offset some of the costs that you pay for higher education. The AOTC applies to the first four years of post-secondary education. The maximum credit is $2,500 per eligible student. Forty percent of the credit, up to $1,000, is refundable. You must file Form 8863, Education Credits, to claim it if you qualify. For more information, see Publication 970, Tax Benefits for Education.

Make sure you qualify before claiming any tax credit. You can always visit IRS.gov to learn about the rules. The free IRS publications mentioned are also available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Additional IRS Resources:

• EITC Assistant tool
• Publication 596, Earned Income Credit
• Publication 503, Child and Dependent Care Expenses
• Schedule 8812, Child Tax Credit
• Publication 972, Child Tax Credit
• Publication 590, Individual Retirement Arrangements (IRAs)
• Form 8863, Education Credits
• Publication 970, Tax Benefits for Education

IRS YouTube Videos:

• Earned Income Tax Credit - English | Spanish | ASL

IRS Podcasts:

• Earned Income Tax Credit - English | Spanish

Claiming the Child and Dependent Care Tax Credit

From IRS Tax Tip Newsletter 2013-34

Claiming the Child and Dependent Care Tax Credit

The Child and Dependent Care Credit can help offset some of the costs you pay for the care of your child, a dependent or a spouse. Here are 10 facts the IRS wants you to know about the tax credit for child and dependent care expenses.

1. If you paid someone to care for your child, dependent or spouse last year, you may qualify for the child and dependent care credit. You claim the credit when you file your federal income tax return.

2. You can claim the Child and Dependent Care Credit for “qualifying individuals.” A qualifying individual includes your child under age 13. It also includes your spouse or dependent who lived with you for more than half the year who was physically or mentally incapable of self-care.

3. The care must have been provided so you – and your spouse if you are married filing jointly – could work or look for work.

4. You, and your spouse if you file jointly, must have earned income, such as income from a job. A special rule applies for a spouse who is a student or not able to care for himself or herself.

5. Payments for care cannot go to your spouse, the parent of your qualifying person or to someone you can claim as a dependent on your return. Payments can also not go to your child who is under age 19, even if the child is not your dependent.

6. This credit can be worth up to 35 percent of your qualifying costs for care, depending upon your income. When figuring the amount of your credit, you can claim up to $3,000 of your total costs if you have one qualifying individual. If you have two or more qualifying individuals you can claim up to $6,000 of your costs.

7. If your employer provides dependent care benefits, special rules apply. See Form 2441, Child and Dependent Care Expenses for how the rules apply to you.

8. You must include the Social Security number on your tax return for each qualifying individual.

9. You must also include on your tax return the name, address and Social Security number (individuals) or Employer Identification Number (businesses) of your care provider.

10. To claim the credit, attach Form 2441 to your tax return. If you use IRS e-file to prepare and file your return, the software will do this for you.

For more information see Publication 503, Child and Dependent Care Expenses, or the instructions for Form 2441. Both are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Additional IRS Resources:

• Form 2441, Child and Dependent Care Expenses and instructions
• Publication 503, Child and Dependent Care Expenses

Important Facts about Mortgage Debt Forgiveness

Important Facts about Mortgage Debt Forgiveness

If your lender cancelled or forgave your mortgage debt, you generally have to pay tax on that amount. But there are exceptions to this rule for some homeowners who had mortgage debt forgiven in 2012.

Here are 10 key facts from the IRS about mortgage debt forgiveness:

1. Cancelled debt normally results in taxable income. However, you may be able to exclude the cancelled debt from your income if the debt was a mortgage on your main home.

2. To qualify, you must have used the debt to buy, build or substantially improve your principal residence. The residence must also secure the mortgage.

3. The maximum qualified debt that you can exclude under this exception is $2 million. The limit is $1 million for a married person who files a separate tax return.

4. You may be able to exclude from income the amount of mortgage debt reduced through mortgage restructuring. You may also be able to exclude mortgage debt cancelled in a foreclosure.

5. You may also qualify for the exclusion on a refinanced mortgage. This applies only if you used proceeds from the refinancing to buy, build or substantially improve your main home. The exclusion is limited to the amount of the old mortgage principal just before the refinancing.

6. Proceeds of refinanced mortgage debt used for other purposes do not qualify for the exclusion. For example, debt used to pay off credit card debt does not qualify. 

7. If you qualify, report the excluded debt on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Submit the completed form with your federal income tax return.

8. Other types of cancelled debt do not qualify for this special exclusion. This includes debt cancelled on second homes, rental and business property, credit cards or car loans. In some cases, other tax relief provisions may apply, such as debts discharged in certain bankruptcy proceedings. Form 982 provides more details about these provisions.

9. If your lender reduced or cancelled at least $600 of your mortgage debt, they normally send you a statement in January of the next year. Form 1099-C, Cancellation of Debt, shows the amount of cancelled debt and the fair market value of any foreclosed property.

10. Check your Form 1099-C for the cancelled debt amount shown in Box 2, and the value of your home shown in Box 7. Notify the lender immediately of any incorrect information so they can correct the form.

Use the Interactive Tax Assistant tool on IRS.gov to check if your cancelled debt is taxable. Also, see Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. IRS forms and publications are available online at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Additional IRS Resources:

• Interactive Tax Assistant tool
• Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments
• Mortgage Forgiveness Debt Relief Act and Debt Cancellation
• Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness

VIA IRS Tax Tip Issue # 2013-31

Take Credit for Your Retirement

IRS Tax Tip Issue # 2013-27

Saving for your retirement can make you eligible for a tax credit worth up to $2,000. If you contribute to an employer-sponsored retirement plan, such as a 401(k) or to an IRA, you may be eligible for the Saver’s Credit.

Here are seven points the IRS would like you to know about the Saver’s Credit:

1. The Saver’s Credit is formally known as the Retirement Savings Contribution Credit. The credit can be worth up to $2,000 for married couples filing a joint return or $1,000 for single taxpayers.

2. Your filing status and the amount of your income affect whether you are eligible for the credit. You may be eligible for the credit on your 2012 tax return if your filing status and income are:

• Single, married filing separately or qualifying widow or widower, with income up to $28,750
• Head of Household with income up to $43,125
• Married Filing Jointly, with income up to $57,500

3. You must be at least 18 years of age to be eligible. You also cannot have been a full-time student in 2012 nor claimed as a dependent on someone else’s tax return.

4. You must contribute to a qualified retirement plan by the due date of your tax return in order to claim the credit. The due date for most people is April 15.

5. The Saver’s Credit reduces the tax you owe.

6. Use IRS Form 8880, Credit for Qualified Retirement Savings Contributions, to claim the credit. Be sure to attach the form to your federal tax return. If you use IRS e-file the software will do this for you.

7. Depending on your income, you may be eligible for other tax benefits if you contribute to a retirement plan. For example, you may be able to deduct all or part of your contributions to a traditional IRA.

For more information on the Saver’s Credit, see IRS Publication 590, Individual Retirement Arrangements. Also see Publication 4703, Retirement Savings Contributions Credit, and Form 8880. They are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Additional IRS Resources:

• Form 8880, Credit for Qualified Retirement Savings Contributions
• Publication 590, Individual Retirement Arrangements
• Publication 4703, Retirement Savings Contributions Credit

6 Money Rules You Can Break

For most people, following basic money rules makes sense. But like everything else in life, there are situations when following tried-and-true advice might not work. Our professionals weigh in on when to consider the exceptions.

Rule No. 1: Pay off debt and build an emergency fund before saving for retirement.

Saving enough money to pay three to six months of living expenses will lessen the chances you'll have to sell assets or go into debt in case of an unexpected big-ticket expense or job loss. J.J. Montanaro, a CERTIFIED FINANCIAL PLANNER™ practitioner at USAA, says building this emergency fund — in something safe and liquid, such as a savings account — should be a top priority, along with paying down any high-interest consumer debt.

When to break it: If your debt is of the low-rate, tax-reducing variety, such as a mortgage or student loans, and your retirement plan at work offers a match, you might be better off contributing enough to receive the full company match before focusing on building your emergency fund and eliminating debt, says Montanaro.

Remember that contributions to a traditional employer-sponsored retirement account, such as a 401(k) or Thrift Savings Plan, may reduce your tax bill. Add the money from your employer match, and you've got a hard-to-beat combination. If you don't participate in these plans, you could be missing out on valuable benefits and tax savings.

Rule No. 2: Save up to 10% of your income.

Contributing at least $1 to your savings (or 401(k) or TSP) for every $10 you earn — or 10% — is an old rule of thumb. And it's certainly better than 3.6%, which is the current national savings rate, according to the Commerce Department.

When to break it: If you didn't begin saving for retirement until you were in your 30s or older, it may take more effort to achieve your retirement goal.

"A late start means you’ve probably got ground to make up, and 10% is probably not enough to close the gap," Montanaro says. To find out how much you need to save to meet your financial goals, use USAA's online calculators.

Rule No. 3: Always max out your employer-sponsored account.

If you need to increase your retirement savings and are not already contributing the maximum amount allowed to your 401(k), a reasonable reaction is to immediately boost your contribution rate.

When to break it: To create a better tax-management plan, you may need to look beyond your employer's plan.

"If you don't have a Roth 401(k) available, you may be better off contributing just enough to take full advantage of a match (if your employer offers one), but then sending additional savings to a Roth IRA, if you're eligible," says Scott Halliwell, a CERTIFIED FINANCIAL PLANNER™ practitioner at USAA. A Roth contribution won't lower your tax bill today, but the possibility of qualified, tax-free withdrawals during retirement is a benefit.

"You'll likely have control over future income tax bills by having money in pretax and Roth accounts," adds Halliwell. What if your income exceeds the IRS limit for making Roth IRA contributions? Consider opening an after-tax traditional IRA and converting it to a Roth. Since 2010, income is no longer a factor in Roth IRA conversion eligibility. Conversions from a traditional IRA to a Roth are subject to ordinary income taxes. Please consult with a tax advisor regarding your particular situation.

Rule No. 4: Send your kid to college — it's a great investment.

Yes, the average college graduate earns $26,618 more a year than someone with just a high school education, according to the U.S. Census Bureau. As a result, most financial planners agree that helping your child get a college education is important.

When to break it: If helping pay for your child's four-year college degree places an extreme burden on your finances, you should consider other, more affordable ways to accomplish this goal.

The return depends on the price you pay and where that money comes from. The nonprofit research group Project on Student Debt reports two-thirds of college seniors who graduated in 2011 had student loan debt, with an average of $26,600 per borrower.

To avoid overpaying for a diploma, Montanaro suggests looking for cost-effective ways to get an education, such as spending the first two years at a community college, then transferring to a four-year college. For 2012-13 enrollment, annual tuition and fees at a community college cost an average of $3,131, compared to in-state tuition of $8,655 for public four-year colleges and $29,056 for private universities, according to the College Board.

Rule No. 5: Buy a house if it costs 2.5 times your annual income or less.

This is a reasonable guide when determining whether you can afford to buy a home.

When to break it: If it doesn't suit your circumstances, disregard this guideline.

What really matters is whether you can afford the monthly payment, factoring in taxes, insurance, maintenance, current mortgage rates and the size of your down payment. Plus, consider how long you'll live in the house. If you plan to move in a few years, renting may be the better decision.

Rule No. 6: When you retire, consider a withdrawal of 4% of your portfolio, then adjust every year for inflation.

Historically speaking, the so-called 4% rule calls for a retiree to make annual inflation-adjusted withdrawals and be reasonably sure the portfolio will last 30 years. For most retirees, it's a fine starting point to determine how much they can spend.

When to break it: Your plan for retirement is not a smooth glide path.

Retirees may prefer withdrawing more in good times and cutting back when times get tough, or varying distributions based on their investment results. Also, adjustments should be made according to other sources of income. For example, Montanaro says some retirees may wish to withdraw more at first and delay taking Social Security, but then withdraw less once the Social Security benefit kicks in. "Whatever your plan, it should be monitored and adjusted as necessary," he says.

USAA's Retirement Center offers financial advice and recommendations to help you plan your future. For guidance, email an advisor or call 1-800-472-8722 Monday through Friday from 7:30 a.m. to 10 p.m. and Saturday from 8 a.m. to 5 p.m. Central Time.

Reprinted from USAA.com https://www.usaa.com/inet/pages/advice-finances-moneyrules?EID=corp_cc_13_03_U250-08

The ABCs of Baby Finance

Raising a child from birth through age 17 will cost a typical middle-income family almost $235,000, according to a 2012 report from the U.S. Department of Agriculture.

Consider the following advice to help you plan for your financial future, prepare for your new baby and protect your growing family.

1. Purchase life insurance. Life insurance is a foundation of financial preparedness and much more affordable than you might think. You should generally get better rates when you're young. Talk to your life insurance company about what amount will protect your family.

Saving for retirement, however, should take priority over saving for your child's college education. Student loans and part-time jobs abound for the college crowd, but loans generally cannot be used for retirement.

2. Start planning for college in the delivery room. The average cost of tuition and fees for the 2011-12 school year was $8,244 for a public college and $28,500 for a private one, according to the College Board. Financial aid and part-time jobs may help your child pay for college. Parents who want to chip in may consider setting aside some money today in a tax-advantaged 529 college savings plan.

3. Update your will and appoint a guardian. Name a contingent guardian and update your will to give your family some protection in case something happens to you.

4. Take advantage of tax savings. The IRS allows you to take an exemption for dependent children, including those born or adopted anytime during the year. Depending on your income, you may also be entitled to a child tax credit for each qualifying child under age 17. Parents who work and pay for day care for their dependent children also may be able to take advantage of a child-care credit. If you work, visit the IRS withholding calculator to see if you should adjust the income tax withheld from your paycheck.

5. First-time parents? Prepare your baby budget now. Long before the due date, examine how your baby will affect everyday expenses. Stroll through baby stores, take notes, then redo your annual budget to include the new line items. This exercise can help you figure out if you need to cut spending in other areas.

6. Experiment with living on one income. If one parent is thinking of leaving the workplace to care for the baby at home, try living on one income, well before the baby arrives, to see how feasible it is.

7. Say bye-bye to brand names. Your baby won't know the difference between top-of-the-line baby blankets and less expensive, quality ones that feel just as snuggly. Hand-me-downs, consignment shops, garage sales and even eBay are great sources for gently used, quality children's clothes at bargain prices.

8. Think twice before buying a new home. A new home for your growing family sounds tempting, but you could find yourself baby-rich and house-poor. Not moving at all might be better, at least for a while.

9. Accept baby-sitting offers. Among the best financial assistance relatives and friends can give is volunteering to baby-sit. If they offer, graciously accept.

10. Use a flexible spending account for day care. If your employer offers a flexible spending account, you may be able to use it to pay up to $5,000 in child-care expenses a year. That money will be exempt from income taxes.

Reprinted from USAA.com https://www.usaa.com/inet/pages/advice-finances-abcsofbabyfinance?EID=corp_cc_13_03_U250-06

Updated Interest Rates 2013

Excerpt IRS Tax Tips Issue 2013-24

Interest Rates Remain the Same for the Second Quarter of 2013

WASHINGTON – The Internal Revenue Service today announced that interest rates will remain the same for the calendar quarter beginning Apr. 1, 2013.  The rates will be: 

• three (3) percent for overpayments (two (2) percent in the case of a corporation);
• three (3) percent for underpayments;
• five (5) percent for large corporate underpayments; and
• one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis.  For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. 

Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The interest rates announced today are computed from the federal short-term rate determined during January 2013 to take effect February 1, 2013, based on daily compounding.

Revenue Ruling 2013-6, announcing the rates of interest, is attached and will appear in Internal Revenue Bulletin 2013-13, dated March 25, 2013.

First Time Homebuyer Credit Repayment

Below is a helpful article from the IRS about repaying your first time homebuyer credit. If you purchased a home in 2008 and received the first time homebuyer credit, read below and be in touch with me if you have any questions on your specific situation.

Tax season is upon us! The sooner you meet with your tax professional to put together the relevant documents and information you need to complete your 2012 return, the better!!


Excerpt from IRS Tax Tip 2013-23...

First-Time Homebuyer Credit Look-up Tool
Helps Taxpayers Who Must Repay the Credit

The IRS no longer mails reminder letters to taxpayers who have to repay the First-Time Homebuyer Credit. To help taxpayers who must repay the credit, the IRS website has a user-friendly look-up tool. Here are four reminders about repaying the credit and using the tool:

1. Who needs to repay the credit?  If you bought a home in 2008 and claimed the First-Time Homebuyer Credit, the credit is similar to a no-interest loan. You normally must repay the credit in 15 equal annual installments. You should have started to repay the credit with your 2010 tax return.

You are usually not required to pay back the credit for a main home you bought after 2008. However, you may have to repay the entire credit if you sold the home or stopped using it as your main home within 36 months from the date of purchase. This rule also applies to homes bought in 2008.

2. How to use the tool. You can find the First-Time Homebuyer Credit Lookup tool at IRS.gov under the ‘Tools’ menu. You will need your Social Security number, date of birth and complete address to use the tool. If you claimed the credit on a joint return, each spouse should use the tool to get their share of the account information. That’s because the law treats each spouse as having claimed half of the credit for repayment purposes.

3. What the tool does. The tool provides important account information to help you report the repayment on your tax return. It shows the original amount of the credit, annual repayment amounts, total amount paid and the remaining balance. You can print your account page to share with your tax preparer and to keep for your records.

4. How to repay the credit.  To repay the First-Time Homebuyer Credit, add the amount you have to repay to any other tax you owe on your federal tax return. This could result in additional tax owed or a reduced refund. You report the repayment on line 59b on Form 1040, U.S. Individual Income Tax Return. If you are repaying the credit because the home stopped being your main home, you must attach Form 5405, Repayment of the First-Time Homebuyer Credit, to your tax return.

Withdrawing from an IRA (Individual Retirement Account) before Retirement

For the 2010 tax year, the due date for all contributions into an IRA account and withdrawals out of an IRA account is April 18, 2011.

There is a 6% excise tax on all contributions to an IRA account that are not withdrawn by April 18, 2011.

In addition, any withdrawal from an IRA account before the age of 59 ½ is included in that tax years gross income with an additional 10% tax penalty. There are exceptions to this penalty however, give me a call to discuss what those are.

Keep in mind the advantages of having an IRA:

-        Contributions to an IRA are fully or partially tax deductible

-        Amounts, earned and gained, in your IRA account are not taxed until you begin withdrawing

If you don’t have an IRA, you can start one, as long as:

-        You (or your spouse if you file as married, joint) received taxable income during the 2010 tax year and,

-        You are not 70 ½ by the end of the year

There are also many kinds of IRA’s. Often times your company provides an option. You can also open an IRA on your own, through a bank or your stock broker. There are simple IRA’s, Roth IRA’s, Individual Retirement Annuities, SEP (simplified employee pension), Retirement bonds, etc.

Saving for your future retirement is important. The laws, taxes, benefits and options can be overwhelming. I can help make the best decision for you, based on your income, lifestyle, circumstances and goals. 

For a free Financial Planning Consultation you may contact me by clicking here; Tax Planning Granada Hills or call: 818.368.5374.