1.Taxes 101- Understanding Deductions & Credits
2.Tax Deductions That You Can't Write Off
3.Overlooked Deductions That Can Be Written Off

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1. Understanding Deductions & Credits

Many people who file overlook a great deal of deductions and credits that are imperative to save money. Now some people, who would rather not admit it, have no idea that a deduction and credit are completely different.

A deduction is a reduction of your taxable income. Some deductions can only be claimed if you itemize, whereas other deductions you are able to claim on the standard deduction. One of the greatest benefits to deductions is to lower your tax bracket, which in turn will mean you owe less taxes.

You will begin by figuring out your adjusted gross income. You may notice on Form 1040 you fill out a lot of different information, which eventually gives you a number that is referred to as an adjusted gross income.

Once you get that number you will then begin taking deductions from there. You will be given the option to itemize or file a standard form. There are some deductions that you will not be eligible for unless you itemize. The common deductions, such as dependent care are available either way.

A credit differs from a deduction greatly. A tax credit is a dollar for dollar reduction of your tax liability. You must first determine your tax bracket and how much you will owe. At that point the credit can be used to reduce that amount resulting in a bigger refund or a smaller check to Uncle Sam.

Unfortunately not everyone qualifies for deductions and credits. It is important to do your research to be sure you are receiving what is owed to you. Many of us are not too savvy with taxes and understanding what we qualify for. It may greatly benefit you to contact a tax preparer.

Some people steer clear of consulting someone to help with taxes because of fees that are charged. Having said that, you will learn in this newsletter any fees paid for help preparing taxes will be deducted. Professional tax preparers often know how to maximize your refund or minimize the amount you owe. As you have heard many times don't be penny wise and dollar foolish. Please reference the newsletter from April 2009 for useful information and tips in regards to choosing a tax professional.

2. Tax Deductions That You Can't Write Off

Child Support & Alimony:

Child support payments are non-taxable. The IRS will not allow the payer to deduct these payments from income. The IRS also will not allow the receiver of child support to claim the payments as income.

The divorce agreement must state that it is child support. Courts often award spousal support, family support or alimony. All of those are taxable. Consult a family law attorney if you are unsure of exactly what you are paying or receiving.

In the divorce papers often times the judge will allocate a certain portion of family support as child support. Assuming you are the payer you will be able to claim the amount of family support as income. If you are the person receiving those funds you must claim them as income.

Roth IRA

An investor cannot take a deduction for a Roth IRA since the income taken from them is tax-free.

Political contributions

Any contribution made to an organization that is not a nonprofit agency cannot be claimed on taxes. In order to be able to take a deduction for a donation the funds had to have been given to a qualified 501c3 agency. You may inquire with the agency you are donating to in regards to the type of tax status they hold.

Homeowners insurance

If you run a business out of your home or own a rental property you may deduct homeowners insurance on your taxes. Without falling into one of these categories you may not use this insurance as a deduction.

Dependents who you cannot claim

Every year countless tax returns are rejected because two people have claimed the same child. There are two credits with minor children. The first is the child tax credit and the second is the dependent care credit.

The child tax credit provides qualifying parents with a credit of up to $1000 per child. Whereas, the dependent care credit is for working parents who must pay daycare expenses. It allows a tax credit for up to 35% of expenses you incurred when providing care for a child, or a disabled spouse while you were working.

The problem arises when both parents claim the same child. The IRS will only allow one parent to claim a qualifying dependant. Every year many filers are upset when they must redo their taxes due to this common error. If you feel that you had the right to claim the dependant child or spouse, yet someone else did you can contact the IRS and prove otherwise with evidence, such as a divorce judgment.

Capital losses

A capital loss is the result of selling an investment at less than the purchased price. Almost everything a person owns and uses for personal purposes, pleasure, or investment is a capital asset. When someone sells or trades capital assets, the difference between its tax basis and the amount it is sold or traded for is a capital gain or capital loss on your tax return. To determine if there is a capital gain or loss, the tax basis of the asset sold must be known. The key point is that capital losses are only losses after they are sold.

Passive Losses

Passive loss rules were enacted to prevent individuals from using tax shelters to reduce tax liability by offsetting passive activity tax credits against other taxable income. In order to take a tax deduction for a passive activity loss on tax returns a person must identify their passive activity losses and income (limited partnership investments, rental activities, or portfolio income). In general, passive activity losses can only offset passive activity income, and passive activity tax credits can only be used against taxes attributed to passive activity income on your tax return. Any passive activity losses and tax credits are tax deferred until the passive activity income is generated or disposed of in a taxable transaction.

3. Overlooked Deductions That Can Be Written Off

Reinvested Dividends
This is not really a deduction, but it is a subtraction that can save a person a lot of money. If your mutual fund dividends are automatically reinvested to buy extra shares, each reinvestment increases your tax basis. That, in turn, reduces the taxable capital gain when shares are redeemed.

Charitable Donations
Insignificant donations at the time may add up and save you a significant amount of money. For example, ingredients needed for chicken soup you prepared for a non-profit (501c3) organization's dinner for the homeless, you drove your car for a charity organization and the mileage can be deducted, etc…

Transportation for medical visits
Many people, especially seniors, depend on a transportation service to provide a ride to and from medical appointments. Any fees paid out over the year for this assistance may be deducted.

Job-hunting expenses that are out-of-pocket can be deducted.
This includes paper, printing, online expenses to post your resume, fees paid to employment agencies, travel to and from interviews, and long distance phone calls, etc… This deduction only applies to people who have been laid off or moving from on job to another.

Student loan interest paid by parents
The IRS gives students a break by if a student is legally obligated to make interest payments and the parents make the payments on their behalf, the IRS allows the student to take the deduction.

Gambling losses
You may only deduct gambling losses if you itemize deductions on your tax return, and the amount of losses cannot be more than the amount of gambling income you reported.

Tax preparation fees
Out-of-pocket expenses paid for tax preparation software, tax publications, and costs for electronic filing can be deducted. It is advisable to keep the receipt or proof of payment.

Student Loan Interest
Student loan interest you paid during the year on a qualified student loan can be deducted. In order to take a tax deduction the loan must be associated with the expenses paid to the educational institution. The maximum deduction a person can take is $2,500. The qualifying rules are that the student loan must have been taken out for the sole reason of paying for education expenses. In order for students to take a deduction, the student loan must be for you, your spouse, or a person you claim as a dependent. The student must also be enrolled at least half the time in a qualifying program.

Moving Expenses for First Job
Moving expenses can be written off for a person's first job. To qualify for this deduction, you must move at least 50 miles from where you are currently residing. You can deduct the costs of moving yourself and your household items to the new area. Mileage, parking fees, and tolls can also be included.

Military Reservists Travel Expenses
A military reservist (National Guard or Military Reserve) is entitled to a tax deduction for travel expenses incurred when traveling more than 100 miles away from home to perform services. You must also incur out-of-pocket travel expenses to attend drills and meetings at least 100 miles away from home. The deduction will be half the cost of all lodging and meals while traveling, along with standard mileage rates.

Child Care Credit

In order to claim credit for childcare there are 10 things to know:

A qualifying person must have provided the care.

You must provide the care so you can look for work.

You must have earned income from self-employment.

The payments for care cannot be paid to your spouse, and you must identify the care provider on your tax return.

Your filing status must be single, married filing jointly, head of household with a dependent child.

The qualifying person must have lived with you for more than half of 2009.

The credit can be up to 35% of your expenses.

For 2009, you may use up to $3,000 of expenses paid in a year for one individual, or $6,000 for 2 or more individuals.

The expenses must be reduced by the amount of any independent care benefits provided by your employer that you deduct.

If you pay someone to come to your house you may be considered a household employer and may have to withhold and pay social security, Medicare tax, and federal unemployment tax.

Estate Tax on Income in Respect of a Decedent
There is an income tax deduction if you inherit an IRA from someone who has passed away. The deduction comes from the amount of estate tax paid on the IRA assets you received. For example, if you inherited an IRA for $50,000 and this money is included in the benefactor's estate totaled $20,000 to the estate tax bill, you are able to deduct that $20,000 on your tax returns as you withdrawal that money from the IRA.

State Tax Paid Last Spring
If you owed and paid taxes when you filed your 2008 tax return in April 2009, that amount can be included in your state tax deduction on your 2009 tax return, along with any state income taxes that may have been withheld from your paycheck.

Refinancing Points
When you refinance a mortgage the points must be deducted over the term of the loan. This means that you can deduct 1/30th of the points a year for a 30-year mortgage. For example, a homeowner paid $2,000 in points and who had a 30 year mortgage could deduct $5.56 per monthly payment, or $66.72 over one year. In the year you pay off the loan, either by selling or refinancing, you are allowed to deduct all of the points that were not deducted previously.

Jury Pay Turned Over to your Employer
Many employers will pay their employee's full salary while they serve on jury duty. On the flip side, that employer will require the employee to pay back what they earned on duty to the company. The downfall to this is it is still mandatory you report it as taxable income. Therefore, the IRS allows you to deduct the amount you received for jury duty that you have turned over to your employer.

Property-Tax Deduction for Nonitemizers
Taxpayers who do not itemize deductions because their mortgage interest and other deductions do not exceed the standard deduction will get a little relief from property tax payments. This deduction lets homeowners who do not itemize elevate their standard deduction amount, by up to $500 if single and $1,000 if married, to account for property taxes paid during 2009.

Casualty-Loss Deduction fro Nonitemizers
Taxpayers who claim the standard deduction can include casualty losses assuming the loss occurred in a declared disaster area. If such a loss has occurred your tax bill will be lowered, and the casualty-loss deduction is not susceptible to the usual reduction equal to 10% of your adjusted gross income.

HOPE Credit for College Juniors and Seniors
The HOPE credit, part of the 2009 stimulus package, increase refunds for qualifying students by expanding the previous college tax deduction, making college juniors and seniors eligible for up to $2,500 in credit. Eligible students must have a minimum of $4,000 in expenses - tuition, fees, books - between January and December 2009. These expenses must have been paid out-of-pocket or with loans in order to qualify for this deduction.

Making Work Pay Credit
This tax credit means more take home pay for many Americans via reduced payroll tax withholding, ($400 if you are single, $800 if you are married), but you will need to claim the credit on your tax return. This is a new tax credit worth up to $400.

Sales Tax Deduction for New Vehicles
If you invested in a vehicle or motor home February 16, 2009, through December 31, 2009, you can now deduct the sales tax you paid for the purchase up to the maximum price of $49,500 per vehicle. This deduction can be either itemized or standard. If you are a married couple with adjusted gross income over $250,000 this deduction is reduced.

Credit for Energy-Saving Home Improvements
If you purchased an energy-efficient product or renewable energy system for you home, you may be eligible for a federal tax credit. The tax credit for energy-saving home improvements is 30%. This credit applies to the purchase of Biomass Stoves, Heating, Ventilating, Air Conditioning, Insulation, Roofs (metal and asphalt), etc. If you are not sure if your item is eligible please check with a tax preparer.

Home Buyer Credit
For a majority of the year, only first time homebuyers received an $8,000 tax credit. After November 6, 2009, longtime homeowners receive a $6,500 credit that owned a home for at least 5 years leading up to the purchase of a new home, after November 6, 2009. Research other qualifying factors to be sure of eligibility for this credit.

For more Frequently Asked Questions, you can click onto the official IRS web site link. http://www.irs.gov/faqs/

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Newsletter 04
Rev.1
April, 2010