Even the most organized people hate tax season, but this year Uncle Sam has a special present: two extra days to prepare. Taxpayers will have until Tuesday, April 17 to file their 2011 tax returns because April 15 falls on a Sunday, and Emancipation Day -- a holiday observed in the District of Columbia -- falls on Monday, April 16. According to federal law, D.C. holidays impact tax deadlines in the same way that federal holidays do. Therefore, all taxpayers will have two extra days to file this year. Taxpayers requesting an extension will have until October 15 to file their 2011 tax returns.
Now on to your returns: Claim these often overlooked deductions and credits and you just might be able to pay less money to the IRS.
Hooray for inflation, at least when it comes to tax preparation. When general prices rise, the IRS nudges up some of its limits. Here's what's new for 2011 returns:
-- Personal and dependent exemption: $3,700, up $50 from 2010.
-- Tax-bracket thresholds increase for each filing status: For a married couple filing a joint return, for example, the taxable-income threshold separating the 15 percent bracket from the 25 percent bracket is $69,000, up from $68,000 in 2010.
-- The maximum earned income tax credit (EITC): $5,751, up from $5,666 in 2010. The maximum income limit for the EITC rises to $49,078, up from $48,362 in 2010.
-- Cost-basis reporting by brokers: As of 2011, brokers must track clients' purchases of stock, real-estate investment trusts and foreign securities, and then report the original cost to the IRS when the asset is sold. This is an effort to improve tax compliance by investors. The rules for investments in mutual funds, bonds, options and many exchange-traded funds.
1. IRA/Roth Conversion: When you contribute to an individual retirement account (IRA), you help fund a future goal while lowering your current tax bill. In other words, socking cash in an IRA is like saving with help from your Uncle Sam.
The rules are pretty simple: You have until the tax-filing deadline (again, that's April 17) to contribute up the lesser of your taxable compensation for the year or $5,000 to a 2011 IRA ($6,000 if you are 50 or older). If you are self-employed, have a Keogh or SEP-IRA, and have filed for an extension to October 15, you can even wait until then to put 2011 money into those accounts.
Even if you're covered by a retirement plan at work, you can deduct some or all of your IRA contribution. The limits have increased for tax year 2011 modified adjusted gross income (AGI) as follows:
-- More than $92,000 but less than $112,000 for a married couple filing a joint return or a qualifying widow(er)
-- More than $58,000 but less than $68,000 for a single individual or head of household, or
-- Less than $10,000 for a married individual filing a separate return.
If your spouse is covered by a retirement plan at work but you are not, your deduction is phased out if your modified AGI is more than $173,000 but less than $183,000. If your modified AGI is $183,000 or more, you cannot take a deduction for contributions to a traditional IRA.
2. Roth IRA conversion: The income limit for Roth conversions was permanently removed, but taxpayers who converted to Roth IRAs in 2011 no longer have the option of deferring conversion income into later years, as was true for 2010 conversions. That means it's time to pay Uncle the taxes due on your conversion.
3. Itemized deductions and personal exemptions: The itemized deduction limitation is repealed for 2011 (and through 2012). This means that taxpayers can deduct the full amount of their itemized deductions in 2011. The personal exemption phase-out rules also do not apply through 2012.
Get the Credit(s) You Deserve
Tax credits are even better than deductions, because they lower your taxes dollar for dollar, instead of being calculated based on your tax bracket. If you are using last year's return as a guide, you should note that some credits, like the Making Work Pay credit, have expired. Still, there are plenty of other credits for taxpayers who qualify -- so don't miss them!
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4. The Child Tax Credit is up to $1,000 for each qualifying child who was under the age of 17 at the end of 2011. This credit can be claimed in addition to the credit for child and dependent care expenses. For married taxpayers filing a joint return, the phase-out begins at $110,000. For married taxpayers filing a separate return, it begins at $55,000. For all other taxpayers, the phase-out begins at $75,000. (Details are in IRS Publication 972.)
5. The Earned Income Tax Credit is a refundable credit (meaning that even if your credit exceeds your tax liability, you don't lose the excess and are entitled to receive any overage as a refund) for married couples filing jointly with 2011 earned income under $49,078 and singles with income under $43,998. The IRS has created handy EITC calculator to help you determine whether you qualify for the credit. (Details are in IRS Publication 596.)
6. The Child and Dependent Care Credit is calculated based on your expenses paid for the care of your kids under age 13 to enable you to work or to look for work in 2011. The credit is 20 percent to 35 percent of your child-care expenses, up to $6,000 -- the size of your credit depends on your income. (Details are in IRS Publication 503.)
7. The Retirement Savings Contributions Credit is designed to help low- and moderate-income workers save for retirement. Individuals with incomes of up to $28,250 and married couples with joint incomes of up to $56,500 may qualify for a credit of up to $1,000 or up to $2,000 if filing jointly. Check out Form 8880 for the rules.
8. Energy and Appliance Tax Credit applies to taxpayers who made energy-efficiency improvements to their homes in 2011. You may be eligible for a tax credit of 10 percent for the cost, up to a maximum of $500. Approved improvements include new windows, insulation, high efficiency furnaces, water heaters and air conditioning, among many others, but you will need your receipts and manufacturer certification as back-up. (Energy Star has a list of items that qualify for the tax deduction).
There are two federal tax credits available to help you offset the costs of higher education for yourself or your dependents. These are the American Opportunity Credit and the Lifetime Learning Credit. To qualify for either credit, you must pay post-secondary tuition and fees for yourself, your spouse or your dependent. The credit may be claimed by the parent or the student, but not by both. If the student was claimed as a dependent, the student cannot file for the credit. For each student, you can choose to claim only one of the credits in a single tax year. However, if you pay college expenses for two or more students in the same year, you can choose to take credits on a per-student, per-year basis.
9. The American Opportunity Tax Credit: Each student can now get a $2,500 "higher education tax credit" for the first four years of college. The credit is based on 100 percent of the first $2,000 of tuition and related expenses, including books, paid during the tax year, plus and 25 percent of the next $2,000 of tuition and related expenses paid during the tax year (subject to income phase-outs starting at $80,000 for singles and $160,000 for joint filers).
10. Lifetime learning credit: The credit can be up to $2,000 per eligible student and is available for all years of post-secondary education and for courses to acquire or improve job skills. The full credit is generally available to eligible taxpayers who make less than $60,000 or $120,000 for married couples filing a joint return.
11. Tuition and Fees Deduction: Every family can deduct up to $4,000 of college tuition and fees in 2011. If your modified AGI is between $65,001 and $80,000 for singles or between $130,001 and $160,000 for joint filers, you are entitled to a reduced deduction of up to $2,000. (IRS Publication 970)
Add Up Those Itemized Deductions
Nearly two out of three taxpayers take the standard deduction rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes. Some of those folks are leaving money on the table. If your deductible expenses exceed the 2011 standard deduction of $5,800 (up $100 from 2010) for singles and married individuals filing separately and $8,500 for heads of household, also up $100 and $11,600 for married couples filing jointly, be sure you itemize and grab these write-offs.
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12. Miscellaneous deductions: These are deductible if they total more than 2 percent of your adjusted gross income. They include tax-preparation fees, job-hunting expenses, business car expenses and professional dues.
13. Sales tax: You can deduct sales tax paid in 2011 if the amount was greater than the state and local income taxes you paid. In other words, you get to choose: Write off your sales taxes or write off your income taxes. If you didn't keep your sales-tax receipts, use the IRS's sales tax deduction estimator. Even if you claim the sales tax amount from the IRS tables, you can add in tax paid on vehicles or boats purchased during the year, except to the extent the sales tax rate on them is more than the general sales tax rate. If you live in a state with a high income tax, like California or New York, you will probably be better off claiming your state and local income taxes rather than sales taxes. If you live in a state with no income tax, like Florida, Texas, or Washington, be sure to take the sales tax deduction when you itemize.
14. Medical expenses: This one is hard to claim, because the bar is so high to qualify. You can only deduct the portion of your 2011 medical expenses that exceed 7.5 percent of your adjusted gross income. (IRS Publication 502)
15. Mileage: Deducting miles driven for work or other purposes can be a huge tax break and save you significant money. The IRS increased the mileage deduction amounts for 2011: Business mileage = 51 cents per mile from January 1 to June 30, and 55.5 cents per mile from July 1 to December 31, 2011; medical and moving = 19 cents per mile from January 1 to June 30, and 23.5 cents per mile from July 1 to December 31, 2011; and charitable = 16 cents per mile.
16. Mortgage insurance deduction: Borrowers with AGI's up to $100,000 may be able to treat qualified mortgage insurance as home mortgage interest, which means that 100 percent of 2011 premiums may be deductible. The insurance contract had to be issued after 2006 and deductions are phased out in 10 percent increments for homeowners with AGI's between $100,001 and $109,000. (IRS Publication 936)
17. Enhanced adoption credits: As part of the Patient Protection and Affordable Care Act (March 2010), the Adoption Tax Credit was extended one year until Dec. 31, 2011, the amount of credit was increased to $13,360 and it was made refundable, meaning that families can benefit even if they have less than $13,360 of federal income tax liability. If adoption expenses have been paid for by an employer, you may qualify to exclude up to $13,360 from income. The credit is subject to income phaseouts from $185,210 to $225,210 in AGI. (IRS Topic 607)
18. Classroom deduction for teachers: K-12 educators who work at least 900 hours during the school year can claim an above-the-line deduction of up to $250 ($500 if married filing joint and both spouses are educators, but not more than $250 each) of any unreimbursed expenses (books, supplies and computer equipment -- including related software and services -- other equipment, and supplementary materials) used in the classroom. (IRS Topic 458)