Itemizing vs. Standard Deduction: Six Facts to Help You Choose

From IRS Tax Tip Newsletter 2013-37 

Itemizing vs. Standard Deduction: Six Facts to Help You Choose

When you file a tax return, you usually have a choice to make: whether to itemize deductions or take the standard deduction. You should compare both methods and use the one that gives you the greater tax benefit.

The IRS offers these six facts to help you choose.

1. Figure your itemized deductions.  Add up the cost of items you paid for during the year that you might be able to deduct. Expenses could include home mortgage interest, state income taxes or sales taxes (but not both), real estate and personal property taxes, and gifts to charities. They may also include large casualty or theft losses or large medical and dental expenses that insurance did not cover. Unreimbursed employee business expenses may also be deductible.

2. Know your standard deduction.  If you do not itemize, your basic standard deduction amount depends on your filing status. For 2012, the basic amounts are:

• Single = $5,950
• Married Filing Jointly  = $11,900
• Head of Household = $8,700
• Married Filing Separately = $5,950
• Qualifying Widow(er) = $11,900

3. Apply other rules in some cases. Your standard deduction is higher if you are 65 or older or blind. Other rules apply if someone else can claim you as a dependent on his or her tax return. To figure your standard deduction in these cases, use the worksheet in the instructions for Form 1040, U.S. Individual Income Tax Return.

4. Check for the exceptions.  Some people do not qualify for the standard deduction and should itemize. This includes married people who file a separate return and their spouse itemizes deductions. See the Form 1040 instructions for the rules about who may not claim a standard deduction.

5. Choose the best method.  Compare your itemized and standard deduction amounts. You should file using the method with the larger amount.

6. File the right forms.  To itemize your deductions, use Form 1040, and Schedule A, Itemized Deductions. You can take the standard deduction on  Forms 1040, 1040A or 1040EZ.

For more information about allowable deductions, see Publication 17, Your Federal Income Tax, and the instructions for Schedule A. Tax forms and publications are available on the IRS website at IRS.gov  You may also call 800-TAX-FORM (800-829-3676) to order them by mail.

13 Deductions That Could Cut Your Tax Bill

For all the talk about tax changes at the end of 2012, many people are still left wondering what it means for them.

" 'Is it a big deal? Or is it business as usual?' are questions I'm hearing," says Scott Halliwell, CERTIFIED FINANCIAL PLANNER™ practitioner with USAA.

"While many issues were resolved, a lot of taxpayers still aren't sure how their tax returns and deductions are affected," he says.

If you're one of those people, brush up on these 13 deductions before tackling your tax return. They are worth reviewing, as they could lower your tax bill.

1. Traditional IRA contributions. You have until April 15, 2013, to contribute up to $5,000 to a traditional IRA for 2012 and, if you qualify, deduct it on your tax return. Here are some guidelines:

• If you were 50 or older on the last day of 2012, you can contribute up to $6,000.
• If you (and your spouse if you're married) weren't covered by an employer's retirement plan in 2012, you can generally deduct your contribution in full.
• If you were covered by an employer plan, you can only take a full deduction if your modified adjusted gross income was $58,000 or less ($92,000 or less for married couples filing jointly). Your deduction is reduced if your modified adjusted gross income was more than $58,000 but less than $68,000 ($92,000 and $112,000 for married couples filing jointly). Above those levels, you may still contribute, but you can't take a deduction.
• If your spouse was covered by a retirement plan at work but you weren't, you're eligible to take a full or partial deduction if your combined adjusted gross income was below $183,000. SeeIRS Publication 590 for more details.

2. Self-employed retirement plans. If you work for yourself, you can open a Simplified Employee Pension IRA by April 15, 2013, and deduct your contribution on your 2012 return.SEP IRAs may be an easy way to create your own retirement plan, and they can allow much higher contributions than traditional IRAs. Contributing to a SEP IRA does not exclude you from making an IRA contribution, but it may affect whether you can take a deduction for it. (A SEP IRA is considered an employer-sponsored plan).

3. Mortgage interest. You're allowed to deduct interest paid on your primary mortgage, as well as home equity loans, home improvement loans and lines of credit. In general, you may deduct interest on up to $1 million of primary mortgage debt and up to $100,000 of home equity balances.

4. State and local taxes. The federal government generally allows taxpayers to deduct property and income taxes paid to state and local governments.

5. Sales tax. If you didn't pay much state income tax — or live in a state that doesn't tax income at all — you may be able to choose to deduct sales tax instead. And you typically don't need receipts — simply calculate an assumed amount using an IRS table or online calculator.

6. Charitable gifts. Donations to charity may ease your tax burden, but only if you have the right documentation. Cash contributions — regardless of the amount — require a canceled check or dated receipt. Any contribution of $250 or more requires bank or payroll deduction records or a written acknowledgement from the charity. Noncash contributions valued at more than $5,000 generally require an appraisal.

7. Education costs. Up to $2,500 in interest on loans for qualified higher education expenses may be deductible if your adjusted gross income is less than $75,000 ($150,000 if you're married and filing a joint return). A portion of your tuition and fees may be deductible if your adjusted gross income is $80,000 or less ($160,000 on a joint return). There are also two tax credits for college costs: the American Opportunity Credit and the Lifetime Learning Credit (See IRS Publication 970).

8. Medical and dental costs. The government sets a high hurdle for these expenses: You may be able to only deduct them if they exceed 7.5% of your adjusted gross income. Be aware that the Patient Protection and Affordable Care Act decreases this deduction for the 2013 tax year because those expenses generally will be deductible only if they exceed 10% of your adjusted gross income. The law does include a temporary waiver for seniors and their spouses if either has reached age 65 before the close of tax years 2013-2016.

9. Health insurance. Self-employed taxpayers get a break on one of their biggest financial headaches. In general, they may be able to deduct all of their health insurance premiums.

10. Health savings accounts. If your family was covered by a high-deductible health insurance plan in 2012, you may be able to contribute up to $6,250 to a health savings account ($3,100 if it only covered yourself). Contributions are deductible, and withdrawals for qualified medical expenses are tax-free. Similar to IRAs, you have until April 15, 2013, to contribute for the 2012 tax year.

11. Job-related moving expenses. If you moved to take a new job, you may be able to deduct your expenses if you pass these two IRS tests:

• Your new job must be at least 50 miles farther from your old home than your old job. If you didn't have a previous job, your new one must be at least 50 miles from your old home. If you're in the military with permanent change of station orders, you do not have to meet these rules.
• If you're an employee, you must work full time for at least 39 weeks during the 12 months after you arrive in the general area of your new job. If you're self-employed, you have to work full time for at least 39 weeks during the first 12 months and 78 weeks during the first 24 months.

12. Guard and Reserve travel expenses. If you traveled more than 100 miles to attend a drill and spent the night, you may be able to deduct lodging expenses, half the cost of your meals and 55.5 cents per mile for travel. You also can deduct tolls and parking fees.

13. Out-of-pocket teacher expenses. Teachers, aides, counselors and principals — kindergarten through 12th grade — should be able to deduct up to $250 for classroom supplies purchased in 2012.

Reprinted from USAA.com  https://www.usaa.com/inet/pages/advice-taxes-taxdeductions?EID=corp_cc_13_03_U250-04&akredirect=true 

Enrolled Agent vs. Accountant

I am asked all the time why I'm an EA (Enrolled Agent) and not an accountant or CPA (Certified Public Accountant), and what's the difference.

It's a common and understandable mistake to think that anyone who can prepare taxes or provides financial services is also an accountant. While the difference isn't huge, it should be noted that accountants, and not enrolled agents, can essentially perform audits. An enrolled agent does not have this ability. This means that while I can be audited and I can manage your finances to prevent audits (by doing work correctly and legally!) I cannot, on behalf of the government, audit an individual or business.

Aside from this auditing ability, I am capable and legally allowed to perform the functions most people of the public understand accountants and CPA's to be able to do. I can prepare tax returns, set up and manage billing and payroll for businesses and help individuals with financial and estate planning and give business advice. According to the NAEA (National Association of Enrolled Agents), of which I am a member, an Enrolled Agent is,

"An enrolled agent (EA) is a federally-authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audits, collections, and appeals."


The word enrolled is important. I am licensed by the NAEA and must maintain my license in order to continue practicing with the privileges granted to an EA. I am legally allowed by the Federal Government to prepare taxes and speak with the IRS on behalf of my clients.  I earned my license by passing a comprehensive exam and maintain my license by attending yearly continuing education courses. All candidates have a background check performed before they are licensed, so you should always work with a tax professional who is either a CPA or EA in order to ensure you are working with an experienced and licensed professional.

Why do I recommend Enrolled Agents who are members of the NAEA, like myself? Because the NAEA is both a respected and reputable organization representing my profession but the standards in order to maintain membership are important. Continuing education requirements and all EA's in the organization must abide by a strict code of ethics. These ethics and continuing education requirements exceed the standard the IRS sets for EA's and tax professionals in order to continue practicing their profession legally.

If you have more questions about the difference between a CPA and EA or want to learn more about my background, education and experience, give me a call or send me an email!

And don't forget tax season is in full swing! Be in touch with me if you haven't yet begun preparing your 2011 Tax Return.

Tax Professional Granada Hills Reviews Disaster Planning

With all the weather related disasters happening around the country and the world many clients have been asking me how to protect their important documents in the extreme case of a natural disaster. I believe this is a great question not just for forces of nature, but anything that might come between you and your documents. What if your house burns down? What if someone robs your house and along with it your safe full of important documents? Or what if your 4-year old starts a connection between your documents and your shredder?

How can you protect your important documents if something happens to them?

The IRS has some helpful hints and I believe everyone should consider adopting one or all of their suggestions. Give me a call and I can help in this process!

1.     Create electronic backups of your important documents!

Truly one of the greatest things about this day and age is our technology. Scanners, email, external hard drives and online backup software can help us keep the information we need safe, create “greener” copies of things we need to reference over time and just gives us peace of mind. Obviously the most important thing to remember when creating a backup (or backups!) or important documents is to keep the sets separate from one another. Consider keeping one at your home and one at your office or at the home of a close family member.

Documents that are important to keep backup copies include: bank statements, tax returns, insurance policies, wills, etc. Many of your financial providers like banks and your lawyer (for wills, documents, etc) keep their own copies of things, often electronically. But don’t count on others to do it for you. Either check to make sure the most recent copy exists through your accounts with them, or make a copy of it for yourself anyway! You can scan documents and save them to different computers, create paper copies and store in different places or burn documents to CD’s and store in a safe place. I suggest investing in a safety deposit box and a fireproof safe for your home as an alternative place to store documents. A fireproof safe and home is convenient for documents you may want to access regularly and a safety deposit box is great for things like insurance policies, wills and power of attorney designations.

2.     Document your valuables.

In the event that your valuables are lost or stolen, you can help yourself after the fact by documenting the things of value you own. The IRS suggests having photographs and lists, room by room, of your belongings. Check out the IRS’s disaster loss workbook to learn more. (link: http://www.irs.gov/pub/irs-pdf/p584.pdf) Again – this list including photographs should have backup copies as well.

3.     IRS Copies

In the event that you lost many of your important tax related documents remember the IRS has copies of previously filed tax returns, including any and all documents attached to each return (like your W-2, etc).  Learn more about preparing for unforeseen disasters on IRS’s website (link: http://www.irs.gov/newsroom/article/0,,id=239917,00.html).

I can help you set up a plan that suits you best to prepare yourself for a situation in which you’d lose some or all of these documents. Making sure you have copies of everything is important but it’s also an overwhelming task that I’m prepared and qualified to help you with. 

Give me a call today – 818 368 5374 or send me an email by clicking Granada Hills Tax Professional