According to the Internal Revenue Service, the biggest claimed value comes from personal exemptions, which in 2005 came to $842 billion.  Most taxpayers, in fact, do claim their exemptions – but there are many other tax perks which may be overlooked.  

1.  Get Educated

If you are within the correct income guidelines, any education-related expenses you paid last year might net you a tax perk or two, including tuition deduction, a Lifetime Learning credit or the Hope credit.

Nearly a quarter of eligible taxpayers did not take advantage of the Lifetime Learning or Hope credits, according to a 2005 US Government report of approximately 1.4 million returns.  On average, each taxpayer only lost about $160, a relatively small amount.  However, one tenth of those taxpayers paid $500 surplus in taxes!

A Lifetime Learning credit can give you as much as $2000 of approved, higher education related expenses for a year.  The Hope credit can net you up to $1650 in tuition and tuition-related fees (not including supplies, books, room or board).  Both credits are income-dependent, and begin to phase out for taxpayers at an income of $47,000 (modified adjusted gross; for married-filing-jointly couples, the figure is $94,000).  The credits disappear completely for taxpayers with a $57,000 MAGI (the married-filing-jointly figure is $114,000).

It is not necessary to itemize in order to receive the fees and tuition deduction, which is worth as much as $4,000.  However, your MAGI must be less than $65,000 if you are a single filer (or $130,000 if you are married-filing-jointly).  Single filers whose MAGI ranges from $65,000 to a maximum $80,000 (for married-filing-jointly couples, $130,000 to $160,00) are only allowed a $2000 deduction; any income higher than this is ineligible for tax deductions. 

Just to make things trickier, you cannot receive the deduction if you take either of the credits.  In general, a credit will be worth more to you than a deduction; however, it is worth checking the figures to make sure which tax perk is the most worthwhile.  Phase-outs, for example, can influence which option is more valuable to you. 

2.  Itemize or standard deduction?

This is one of the most financially significant tax decisions you will make.  For 2007 returns, the standard deduction is $10,700 if married-filing-jointly, $5,350 if single, and $7,850 for the head of a household.

Congress’s investigative arm, the GAO, found in 2002 that only one-third of filing taxpayers choose to itemize.  Approximately $438 on average was lost per taxpayer–$945 million all told-due to not itemizing.

One of the major reasons for not itemizing is the extra time and trouble involved.  Many taxpayers procrastinate and end up losing out.  Instead of hunting for data and records at the last minute, taxpayers should collect them all before hitting the computer.

It is fairly simple for homeowners to judge whether itemizing is worthwhile for them or not.  Add up everything you paid for real estate taxes, mortgage interest, income taxes (state and local), and simply compare the figure against the standard tax deduction.  Be aware, if you are over 65, you can add $1,300 (if filing singly) or $1,050 (if married) to your standard tax deductions.

If you don’t own your own home, don’t write off itemizing.  Renting taxpayers may still be able to claim large medical bills, investment advice fees, trustee fees, charitable donations, investment expenses, state income taxes or even sales taxes.  All these are considered deductible expenses, and might tip the scale, making itemization the smart choice.

For example, as an itemizer you can choose a valuable perk, which may be worthwhile if you live in a state with low or no income tax-deduct your state sales tax in lieu of your state income taxes.

3.  Credit Where Credit’s Due

As a general rule, tax credits are more valuable to you than tax deductions, as they directly reduce your tax payment dollar for dollar.  As well as claiming education credits, remember to claim a child tax credit for every child up to the age of 17.  If you qualify, this can be worth $1,000 per child. 

Parents may also be able to take credits for child care and dependent expenses, including summer day-camp and day-care costs (although not sleepover camp).  This perk could save you up to $2,100 on your tax bill.

If you have invested in a mutual fund overseas or internationally, you may have already paid foreign taxes.  Check your statements to see if you are eligible for a ‘foreign taxes paid’ credit.

Lower-income taxpayers should be aware of the saver’s credit.  This one caps at $1000, and is designed to encourage retirement saving among taxpayers with lower incomes.

4.  Big benefits in Small Business!

Section 179’s expense election can give business owners who have purchased equipment such as trucks, furniture or computers (some limitations apply) as much as $125,000.

Likely the most valuable deduction you will receive, you don’t even have to spend the money to benefit.  If a contractor decides to purchase two new vehicles, financing the majority of the cost, you could purchase one of those vehicles on credit, netting yourself a $60,000 deduction while avoiding spending that amount of money.

Better still, the deduction can reduce the taxable income of your spouse.  If you are a contractor whose wife works at a W-2 job, your depreciation under section 179 can be placed against her W-2 income to offset it, even if it has already been taken to zero. 

An extremely valuable strategy is for people starting up businesses to use their Section 179 exclusion to zap their partner’s income down almost to zero.  This is worthwhile because starting a business is so capital-intensive.

5.  Charitable donations

Many taxpayers fail to utilize the full advantages of charitable tax deduction, which can give you up to half of your adjusted gross income.

Before you begin doing your taxes, collect your receipts and think hard about your charitable giving over the past year, including donated clothes and toys.

Among itemizing taxpayers, charitable contribution deductions are the fourth most valuable deductions.  In 2005, the IRS reported that taxpayers claimed $172 billion in these deductions.

Sadly, the rules have tightened somewhat this year.  Proof in the form of written receipts or bank records is now required from the recipient for cash donations, not of $250 and above like last year, but of any amount at all. 

The IRS states that any donated second-hand items must have been in ‘good’ condition at least.  25% of the price you initially paid for clothing is considered to be thrift shop value, and can be deducted. 

Plan for Next Year

Planning ahead can net you some of the best tax perks around.  Putting money into a retirement account such as a 401K is a great way to save on taxes, by reducing your taxable income.

Another tax perk which can be very valuable is the annual tax exclusion for gifts.  A gift from one person to another up to $12,000 in value is tax-free.  Tax-free gifts from a parent or grandparents can be a tremendous help in our current economic slowdown.

As long as the gift is below $12,000, the recipient does not even need to file a report or gift tax return.

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Calculating adjusted gross income (or AGI) is actually quite simple. Take all the income you report on your taxes, your “gross income,” minus any deductions (called “adjustments”) and what’s left is your adjusted gross income. The following items are all expenses you can legally deduct from your gross income:

Employment Expenses

• One-half of your self-employment tax
• Contributions to qualified retirement, investment and savings plans
• Performing artists’ qualifying expenses
• Educator expenses up to $250
• Rent and royalty expenses

Medical Expenses

• Archer Medical Savings Accounts (MSAs)
• Health Savings Account (HSA) contributions
• Self-employed health insurance

Investment Expenses

• Capital losses up to $3,000.
• Interest forfeited by withdrawing certificates of deposit (CDs) before their maturity date

Business Expenses

• General business expenses
• Domestic production activities deduction
• Net operating losses (NOLs)

Educational Expenses

• Student loan interest up to $2,500
• Tuition and fees up to $4,000
• Travel expenses from attending National Guard or military reserve meetings more than 100 miles from home

Other Expenses

• Jury duty pay turned over to your employer
• Legal fees for illegal discrimination claims
• Moving expenses
• Unemployment benefits repaid because of trade readjustment allowances

Of course, if you are nearly finished or have already filed your tax return, finding your AGI is easy – it’s already on your return! You can find your AGI on line 37 of the 2007 Form 1040, line 21 of the 2007 Form 1040A, or line 4 of 2007 Form 1040EZ.

Some tax benefits are dependent not on your AGI, but on your MAGI, or modified adjusted gross income, which is just your AGI with certain deductions added back in. Unlike your AGI, you may have several MAGIs, depending on which deductions you are required to include in order to receive a benefit. For example, your MAGI for the student loan interest deduction is your AGI added to the amount you deducted for tuition and fees, foreign earned income, and other foreign income and expenses.

Once you calculate your AGI and MAGI, it will be much easier to determine which tax benefits you qualify for. Sometimes your AGI will be too high for you to claim a certain credit. Sometimes it will be too low. But other times, it will be just right!

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Here are five simple rules to remember when looking for tax breaks:

1. Don’t lie. If you can’t exempt, defer, or cancel out a certain part of your income, you must pay taxes on it.  Hiding, renaming, or lying about your money is a sure way to get audited, fined, and even arrested in some cases.

2. Obey the spirit as well as the letter of the law. Congress creates doesn’t create tax breaks just to be nice. Sometimes they want to boost the economy, sometimes they want to save the environment – whatever the reason, make sure that it applies to you. Bending tax law to fit your situation can be illegal. If you’re not sure, consult a tax professional.

3. Take tax credits before deductions. Tax credits are better than tax deductions. A tax credit removes a lump sum from your tax bills; deductions reduce your taxable income, so their worth varies according to your tax bracket. For example, say you are in the 30% bracket. A $1000 tax credit directly reduces your tax bill by $1000. A $1000 deduction, on the other hand, would only save you 30% of $1000, or $300.

4. File the right form. Some tax breaks require you to use a certain tax form. You may need to file the “long form,” or 1040, rather one of the simplified forms (1040A or 1040EZ). Be sure to read all the instructions carefully and talk to a tax professional if you have problems.

5. Beware the Alternative Minimum Tax. The alternative minimum tax, or AMT, is often referred to as a “shadow tax system,” because it doesn’t follow the same rules as your regular income tax. The AMT was established to make sure everyone pays a certain minimum tax, no matter how many deductions you qualify for. If your regular tax falls below this minimum, you will have to pay an alternative minimum tax.

You can begin today – find out what tax benefits you qualify for and start taking a ‘break’ from high taxes!

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1. Maintain detailed records: This is one of the most important tax tips because, without the big company resources to hire someone to track income and expense records, it is your responsibility to maintain thorough records and keep each receipt to support all of your tax deductions.

2. Deduct your professional space: If you use a separate office space or designate a portion of a spare room in your home or your basement, you are allowed to deduct the percentage of the part of your home you use exclusively for professional purposes. Claim a tax deduction for this percentage from your rent or mortgage payments, utilities, etc. If you keep a cell phone or land line exclusively for business purposes, deduct the amount from any bills.

3. Be sure not to overlook business expenses: Maintain thorough records and keep all receipts for professional travel and other business expenses, which may include supplies for the office, postal and shipping fees, dues for professional memberships, magazine or newspaper subscriptions, and other business items, including software for your computer or technical upgrades.

4. Subtract Daycare costs: The IRS allows deductions for all types of childcare that may be provided during your business hours. These kinds of tax tips are often overlooked but they can save you a lot of money, so be sure to take advantage of the allowed deductions.

5. Create a retirement plan: Consider creating a self-employed retirement plan (that is, a SEP IRA) for tax purposes, as well as for the sake of building money to fund your retirement. You can start with as little as $100, but should you have $2,000 or more, consider a Keogh plan option, which will allow you to keep more money for your retirement in savings that are tax-deferred.

6. Hire your family members: You may subtract medical expenses for the whole family if you hire them legitimately.

7. If needed, defer income: As your own boss, you are allowed to slightly alter your billing so that you can defer income should you find you are in an elevated tax bracket.

8. Get tax refunds from your FICA: Because you are your own employer, you have to pay both the employee and the employer Social Security portions when it comes to your taxes. However, you may deduct 50% of your payments on the 1040 form.

9. If needed, increase expenses: Just like you may choose to defer your income, should you find that you have a high income that pushes you to the next tax bracket, you may conduct more business purchases at the end of the year to augment some of your tax deductions before the 31st of December.

10. Get the correct tax help: Seek tax help from a person who is very well-versed on self- employment issues because your needs differ from a company’s needs.

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1. Clear the Calendar: Lack of time is the largest contributor for procrastination. After examining your schedule, select one day dedicated to filing your taxes. If this requires closing the business or filling in with additional employees on that day, just do it.
2. Hire a Bookkeeper: If you are overwhelmed at the thought of the work involved in filing your taxes, you may need to hire a bookkeeper. He or she can assist you to organize business concerns, so that April taxes aren’t such a daunting thought.
3. Take a Trip to the Spa: An overlooked way to increase productivity is to reward yourself when you accomplish a tough task. Rewards to consider might include a day at the spa, a massage, a family outing, or any other reasonable thing that will help motivate you.
4. Use Tax Software: Computer software helps automate some of the more routine and tedious aspects of tax preparation. There is a variety of programs available, most of which would have all the forms available that you need to prepare your return.
5. Find an Accounting Professional: The complexity of the financial issues your operation faces will increase as your business grows. Having the right help with your accounting and finances can save you hassle, frustration and mistakes. Accounting professionals can even provide more general business advice such as handling cash flow issues and tax tips.
6. Remember to Pay Yourself: Here’s an easy way to determine just how valuable you are to the company: For the fiscal year, calculate your profit after expenses, then divide the figure by the number of hours you worked. This determines your hourly pay rate. Then, determine your tax refund divided by the number of hours that are required to finish the return. If this amount works out to more than or the same amount as your hourly rate, it will likely be enough to motivate you to prepare the tax return.
7. Apply for an Extension: Most small business owners suffer from overscheduling and a lack of leisure time. Tax deadlines just add to the stress. Consider requesting time extension from the IRS – it will give you the time you need to catch up.
8. Enroll in a Tax Preparation Course: If you don’t know precisely what to do, you may put off filing. You can gain the necessary information and bolster your self-confidence by taking a one-day tax preparation class designed for small business owners. Such classes or workshops, given via the internet, are provided at no charge by the Internal Revenue Service and certain affiliated organizations. They cover such areas as revenues, expenses, e-filing, record keeping, employment taxes, etc.
9. Time for a CFO?: As the company grows, so do its financial matters.  There comes a time when a staff accountant may no longer be enough for the company. The company’s management team may be spending a great deal of time making financial decisions, taking away from their other duties. Or the company, in its quest for additional growth, may desire to offer public stock or raise additional capital. At this point you may want to consider hiring a CFO.
10. Take Baby Steps: Reflect on the start-up of the company. If you had stopped to consider every task necessary to begin the business, you probably would have never have started the business. So, start small. Begin with an easy task like organizing files and continue from that point.

Tax time is never a fun time of year, but the pain created by procrastinating the completion of your tax return is worse. Take that burden and unnecessary guilt off of your shoulders by getting it done without delay and decreasing your April stress level in the process.

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Tax Deductions for Mileage

Your daily round-trip commute is now a business mileage tax deduction, due to a IRS mileage reimbursement loophole that says:  Any miles driven between two business locations qualify as a business mileage tax deduction.  Thus, Your round-trip “commute” is 20 miles per day: 20 miles X 5 days = 100 miles per week, 100 miles per week X 50 weeks = 5,000 miles per year, 5,000 business miles X .36 cents = $1,800 mileage deduction.

Now you have a nice $1,800 mileage deduction – a mileage deduction that you’ve probably been entitled to for years but didn’t even know it.  $1,800 mileage deduction X 32% income tax rate = $576 in actual tax savings (27% federal income tax + 5% state income tax).  This is Five-hundred and seventy-six bucks: Savings every year.

For more details, check out this article on deducting your commuting mileage.

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Here’s the question sent in by the filife blogger:

Should I file individually (as opposed to my parents claiming me as an exemption)? I’m under 24 and a full-time college student who lives in student housing (but I’m thousands of miles from home), but my parents do not provide more than half of my support. I work and pay for school (tuition, books, housing, food, etc.) with scholarships, personal savings and money from work that is taxed, but not part of federal work study. I’m not legally emancipated. If I am eligible to file individually, would this maximize my own return? Or is the difference the same?

She indicated her preferred time window was between 2-4 p.m. for the people from TurboTax to respond.   However, they didn’t answer the first time.  They only sent an apology e-mail that they missed it (maybe they got a little busy).

So, she tried it again. Within the next two hours, she got the call! The enrolled agent not only answered the original question, but answered all of her follow-up questions for twenty minutes.

He covered the bases, answered all her questions, pointed out the right forms on the IRS site and offered some tax deduction tips for things to do which would maximize her refund, such as starting an IRA and investigating the Lifetime Learning Credit.

Her summary: 

Although it took me two stabs to get my tax question answered, the FreeTaxQuestion was ultimately worth it. They called me back, dealt with my tax angst and all of it was at no cost.

I feel much more confident about tackling my 1040 in the next couple of months. And if a tax prom comes up, I’ll know who to call.

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If you own rental property, you should be aware of your tax deduction options. Knowing how to save money can help you to pay your mortgage and keep your income higher from your rental units. You can get different benefits and should know about the normal deductions that you can make from your properties.

1. You can deduct interest that you paid for your credit card if you were using it to buy items or services that improved your rental unit. You can also deduct interest that you’ve paid on a mortgage loan. This is the most common form of deduction that you can make.
   
2. You can claim depreciation on your tax return every year for up to 27 years. This can help you to make any money that you would lose otherwise.
   

3. If you want to repair things are your property than try to do so and remember to make the deductions the year that you did the projects. This includes a wide array of things such as laying down tiles, repairing broken pipes, putting plaster on walls with holes, replacing broken glass windows or frames, and any other home improvement type project that you can think of to make in your rental property.
   
4. If you need to travel as part of your job or live far away from your rental property than you can include this in your tax deduction claims. You may need to travel to and from your property to take care of rental business with your tenant, to supervise repairs, to advertise your rental units, or a host of other reasons that are valid enough to claim a tax deduction during the year that the travel incurred. If you work your way around it you can use this clause to have some pleasure during your travels as well.
   

5. If you work from your home on your rental properties than make sure you claim this as a tax deduction. Your home office is a great way to save some extra cash while you get your business done.
   
6. If you’ve had a significant loss from a fire or a flood than you can claim this on your tax deductions. This can cover a partial loss or a complete loss of property. You will have to compare your insurance to your deductions to figure it out.
   
7. If you are paying a lot to insure your rental property than have no fear, because you can claim this insurance on your tax deductions. This means that any insurance such as theft, flood, or fire insurance can all be claimed and help you save money on your taxes.
   
8. If you have to pay fees for various services such as a lawyer, an accountant, or a rental agent then you can also be sure that these can be deducted. The collaborator Ray Walberg is very excited about ideas relating to woodworking tools and cnc machinery. Through his detailed writings on cnc machines and tools and cnc machinery the columnist improved his know-how in the field.

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