If you're a high-income type, you're probably painfully aware that some tax breaks are phased out (either reduced or eliminated) as your adjusted gross income, or AGI, increases. That's the price of success, right? Well, not necessarily. Believe it or not, some tax breaks are available to just about anybody -- regardless of income. Here are six of them.
If you're self-employed, you may be able to contribute and deduct up to $49,000 for 2011 and up to $50,000 for 2012 by setting up a simplified employee pension, or SEP. Contributing to a SEP could dramatically reduce your taxable income and save you a bundle. Think you've already missed the boat for your 2011 taxes? Think again. If you don't already have a retirement plan in place, you can still set up a SEP and make a deductible contribution to your account for 2011. And that could be done as late as Oct. 15 of this year if you extend your 2011 return for the automatic six-month period.
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Credit for Overpaid Social Security Taxes
Did you have two jobs last year and earn more than $106,800? Then you probably had too much withheld for Social Security tax. Your credit will be for the amount you contributed beyond $4,486, which represents the 4.2% Social Security tax based on a maximum salary of $106,800. Getting the money back is easy -- just report the overpaid amount (you can tell what that is by looking at your W-2s) on Form 1040, line 69.
Deducting Alimony Payments to Your Ex
Assuming you qualify, you can claim a full write-off of your alimony payments on line 31a on page one of Form 1040.
Writing Off Your Gambling Losses
So Lady Luck up and left you during your last trip to Vegas, huh? Believe it or not, Uncle Sam feels your pain, and will allow you to deduct your losses up to the amount you've won during the year on Schedule A, line 28, assuming you itemize deductions. (Your gross winnings are taxed as regular income and should be reported on line 21 of Form 1040.) But beware: If you claim this deduction, you should have written evidence of your losses, just in case you get audited. So try to dig up some evidence (slot club statements, etc.). In the future, keeping a journal of your daily net wins and losses should do the trick. After all, asking that blackjack dealer for a receipt might be tricky.
Writing Off Your Investment Interest
Did you borrow on margin last year? As long as you itemize deductions on your return, you probably can deduct the interest you paid on the account on line 14 of Schedule A (assuming you itemize deductions). The deduction for the interest paid to carry taxable investments (so-called investment interest expense) is unaffected by any phase-out rules. There's only one small catch: Your investment interest expense deduction generally can't exceed your taxable income from interest, annuities, royalties and short-term capital gains. That said, any excess investment interest expense can be carried over to the following tax year. See IRS Form 4952 (Investment Interest Expense Deduction) for all the details (including a special election to treat long-term capital gains and dividends as investment income).
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The Dependent Care Credit
OK -- so this last tax break is technically subject to some AGI phase-out rules. But truthfully, nearly everybody who claims this credit is partially "phased out." What's left is still a great tax break.
If you worked last year and paid someone to take care of your under-age-13 child, you could be eligible for this credit. Keep in mind, if you're married, both spouses must work, unless one is a student. Additionally, neither of you could have contributed to a child-care flexible spending account (through your employer) to cover the same expenses last year.
If your income (married or single) exceeds $43,000 then you can take a credit equal to 20% of your child-care expenses. However, the credit limit is $600, if you have one child, or $1,200, if you have two or more. (If you earned less than $43,000 you may be entitled to a larger credit.) Thankfully, the definition of child care is generous -- it can cover anything from summer day camp to a baby sitter. See Form 2441 for details. Claim your credit on line 48 of Form 1040.