Article: 2011 Tax Planning - Deductions vs. Credits
By Barbara S. Collins, CPA
The football season is up and running. New fall television shows are replacing summer reruns, and chain stores are enticing kids with the latest trends in Halloween costumes.
Guess what all this means? It's time to begin thinking about your 2011 tax returns to ensure you are able to maximize the available tax deductions and take full advantage of available tax credits in order to minimize the taxes you'll have to pay.
Bet you are already asking, "What's the difference between a tax deduction and a tax credit?"
Simply put, a deduction lowers your taxable income, while a tax credit lowers you tax bill dollar for dollar. In general, a $1,000 deduction lowers your tax bill by $250 (if you are in the 25% tax bracket). A $1,000 credit, however, lowers your tax bill by the full $1,000.
However, there are usually restrictions and limitations on qualifying for deductions and credits.
Let's take a closer look at tax deductions.
DEDUCTIONS:
Successful tax planning includes a review of your available deductions and the impact of your filing status on your option to itemize.
Remember:
It's important that all of the technical requirements for your deductions are met.
Certain items are deductible only to the extent they exceed a percentage threshold.
By reducing your adjusted gross income, you increase the amount of itemized deductions you can claim because the floor limitation amounts are reduced accordingly.
Maximize Itemized Deductions: A strategy commonly used in year-end individual tax planning is to determine the best timing for claiming itemized deductions. Generally, it is beneficial for taxpayers to defer income and accelerate expenses. This strategy may enable you to itemize your deductions if you claimed the standard deduction in the past.
Although maximizing your itemized deductions is an important aspect of tax planning, there are other issues you need to consider in light of your overall tax scenario.
What Can You Deduct?
1. Charitable Contributions:
That's right. If you made a donation to a charity this year, you may be able to take a deduction for it on your 2011 tax return. However, these are guidelines to consider:
Charitable contributions must be made to qualified organizations.
You can deduct cash contributions and the fair market value of most property you donate.
Special rules apply to several types of donated property such as clothing and household items.
Keep good records of all contributions made. For cash contributions, keep your cancelled bank or credit card statement. For property, you must obtain a written statement from the charity containing the date and amount of the contribution.
For large donations, you need additional documentation. For example, for cash contributions of $250 or more, you need a written acknowledgment from the organization. For property valued at more than $500, you need to complete Form 8283, and attach it to your return. For noncash contributions of $5,000 or more, you must generally get an appraisal.
2. Miles driven for a charity, such as a church.
3. Moving or Job Hunting Expenses:
Individual tax payers seeking new jobs may incur a variety of expenses, including costs directly associated with moving to a new job location or those specifically related to the job search. Many of these expenses are deductible, but the rules are strict and expenses must be carefully documented and sustained. You may be able to take advantage of these deductions, if you plan carefully.
Any moving expenses you may incur, including expenses of traveling to the new location and transporting household goods and personal effects, are deductible as long as you meet certain requirements relating to when you begin work at the new position and how far the new job is from the old job and your old residence. These expenses are deductible, even if you are seeking employment for the first time, or in a completely new field. Also, qualified moving expenses reimbursed or paid by your employer are considered nontaxable fringe benefits.
You also may be able to deduct the expenses you incur in search for a new job, including the cost of a headhunter or employment service and the expense of preparing your resume. These expenses are deductible as long as the job being sought is in the same line of work as the old job, even if you are unemployed at the time of the job search. Get this: the job search doesn't have to be successful in order to qualify for the deduction. However, job hunting expenses for a first job, or related to changing to a new career are not deductible.
4. Money loaned to family that hasn't been repaid:
Amazingly, you can deduct this as a worthless debt on your personal tax return.
5. Miles driven to and from doctor and hospital visits.
6. Health Savings Account :
If you choose a high deductible health plan, through your employer or on your own, you can contribute to a Health Savings Account and take a tax deduction. For 2011, you can contribute up to $3,050 to a single HSA or $6,150 to a Health Savings Account that covers your entire family. You can write off those HSA contributions even if you do not itemize your deductions.
7 . Educator expenses
If you're a qualified educator, you can get an above-the-line deduction of as much as $250 for materials you bought in 2011. That includes books, supplies and even computer equipment.
8. Mortgage Interest:
If you itemize your deductions, can write off the amount you paid in interest on your home mortgage.
9. IRA Contributions:
For 2011 you can contribute up to $5,000 to your IRA, plus an extra $1,000 if you are 50 years of age or older. You have until the tax filing deadline, generally April 15, to make your IRA contribution for the previous year.
10. Business Expenses:
If you own your own business, you can take a deduction for expenses directly related to the operation of that business. For instance, if you have a dedicated office in your home, you can take the home office deduction and lower your taxable income. You can also take a deduction for the depreciation of computers, machinery and other equipment used in your business. If you work for someone else, you can deduct the cost of office supplies and equipment you purchased to do your job, as long as those expenses have not already been reimbursed by your employer.
TAX CREDITS
Tax credit can be more valuable than deductions because they are dollar-for-dollars. However, credits are somewhat more difficult to qualify for. Credits can be refundable or non-refundable.
Refundable credits can be taken in full without regard to your tax liability.
Non-refundable credits can not reduce your tax liability below zero.
Here are a couple of examples of things for which you can receive tax credits:
Education Credits:
The federal tax incentives for education include the American Opportunity and Lifetime learning credits, the student loan interest deduction, Coverdell education savings accounts, and others. They have different criteria, but one or more could help you to maximize your tax savings. The most beneficial options will depend on your current and anticipated expenditures for high education.
Even if you or a dependent is not currently enrolled in a post-secondary school, it's important to start planning for that day. Some of the education tax breaks, such as Coverdell ESAs and 529 plans allow you to save money today for future education expenses. With the costs of post-secondary education going up every year, the sooner you start saving, the easier it will be to afford those costs.
Child Care and Dependent Care Expenses
Individuals, who pay for daily care for the children or disabled adult, may be eligible for a tax credit.
Eligibility Criteria:
Your child must be 12 years of age or younger, or be physically or mentally unable to care for him/herself. You must maintain a home for the dependent and pay more than half of the costs of maintaining the home.
A qualified daycare provider can not be one of your dependents, and must be age 19 or older. The daycare provider must provide you with his/her name, address and social security number of employee ID.
You must complete Form 2441 and attach it to your tax return.
The rules for the various tax credits, including who can claim them and for what types of expenses can be claimed, are complex. Ditto for deductions. Because they are so complex, many people overlook them or are afraid to claim them.
That is where we can help. If you have any questions regarding the rules regarding deductions or credits, please do not hesitate to call the Leverich Group at (801) 364-4949.
