J.K. Lasser's 1001 Deductions and Tax Breaks 2011 E-Book

Barbara Weltman

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: J.K. Lasser
• Sprache: Englisch

Seitenzahl: 751

Veröffentlichungsjahr: 2010

Beschreibung

A straightforward guide to taking tax breaks and deductions Completely revised to reflect important changes in this year's tax laws, J.K. Lasser's 1001 Deductions & Tax Breaks 2011 will help you take advantage of every tax break and deduction you may be entitled to. This comprehensive guide is clearly organized by subject matter so you can easily find situations that may apply to you. Each tax benefit is also clearly explained-along with the eligibility requirements for claiming the benefit-while planning tips and common pitfalls associated with the benefit in question are discussed in detail. New tax law alerts are also included throughout the book, so you can make the most informed decisions possible. * Discusses deductions and tax breaks with regard to your family, home, car, job, investments, education, charitable giving, health coverage, and much more * Packed with hundreds of updated examples, practical advice, and real-world examples * Online supplement to update developments * Other titles by Weltman: J.K. Lasser's Small Business Taxes 2011 and J.K. Lasser's New Tax Laws Simplified 2011 J.K. Lasser's 1001 Deductions & Tax Breaks 2011 is a book every taxpayer should own.

Leseprobe

Contents

Cover

Half Title Page

Series

Title Page

Copyright

Introduction

Tax-Favored Items

Limits on Qualifying for Tax-Favored Items

Standard Deduction versus Itemized Deductions

Impact of Deductions on Your Chances of Being Audited

How to Use This Book

Chapter 1: You and Your Family

Personal Exemption

Dependency Exemption

Child Tax Credit

Earned Income Credit

Dependent Care Expenses

Adoption Costs

Foster Care

Child Support

Alimony

Chapter 2: Medical Expenses

Itemized Medical Expenses

Self-Employed Health Insurance Deduction

Health Insurance Credit for Eligible Recipients

Long-Term Care Coverage

Flexible Spending Arrangements for Health Care

Health Reimbursement Arrangements

Health Savings Accounts

COBRA Coverage

Medicare

Continuing Care Facilities and Nursing Homes

Accelerated Death Benefits

Decedent's Final Illness

Chapter 3: Education Costs

Employer-Paid Courses

Scholarships, Fellowships, and Grants

American Opportunity Credit

Lifetime Learning Credit

Job-Related Education

Tuition and Fees Deduction

Student Loan Interest

Interest on U.S. Savings Bonds

Coverdell Education Savings Accounts

Qualified Tuition Programs (529 Plans)

Seminars

Educational Travel

Cancellation of a Student Loan

Penalty-Free Withdrawals from IRAs

Government Reimbursements

Chapter 4: Your Home

Mortgages

Mortgage Interest Tax Credit

Home Equity Loans

Points

Refinancing

Prepayment Penalties

Late Payment Penalties

Mortgage Insurance

Reverse Mortgages

Cancellation of Mortgage Debt

Penalty-Free IRA Withdrawals for Home-Buying Expenses

Homebuyer Credit

Real Estate Taxes

Real Estate Tax Rebate for Volunteer Responders

Cooperative Housing

Minister's Housing Allowance

Home Sale Exclusion

Moving Expenses

Energy Improvements

Chapter 5: Retirement Savings

Traditional IRAs

Roth IRAs

IRA Rollovers

401(k) and Similar Plans

Self-Employed Retirement Plans

SEPs

SIMPLEs

Retirement Saver's Credit

Custodial/Trustee Fees

Employer-Paid Retirement Planning Advice

Charitable Transfers of IRA Distributions

Chapter 6: Charitable Giving

Cash Donations

Appreciated Property Donations

Used Clothing and Car Donations

Intellectual Property Donations

Real Estate Donated for Conservation Purposes

Bargain Sales

Volunteer Expenses

Tickets to Fund-Raisers, Raffles, and Sporting Events

Membership Fees to Nonprofit Organizations

Student Exchange Program

Donor-Advised Funds

Appraisal Fees and Other Costs

IRA Transfers to Charity

Record Keeper for Your Charitable Giving

Chapter 7: Your Car

Business Use of Your Personal Car

Employer-Provided Car

Vehicle Registration Fees

Car Accidents and Other Car-Related Problems

Donating Your Car

Hybrid Vehicle Credit

Credit for Plug-In Electric Drive Vehicles

Credit for Low-Speed Electric Vehicles

Credit for Plug-In Vehicle Conversions

Chapter 8: Investing

Penalty on Early Withdrawal of Savings

Loss on Bank Deposits

Capital Losses

Capital Gains and Qualified Dividends

Worthless Securities

Loss on Section 1244 Stock

Margin Interest and Other Investment-Related Borrowing

Safe-Deposit Box Rental Fee

Subscriptions to Investment Newsletters and Online Services

Home Computer Used for Investments

Fees for Financial Advice

Amortization of Bond Premium

Municipal Bonds

Savings Bonds

Gain on the Sale of Small Business Stock

Gain on Empowerment Zone Assets

Foreign Taxes on Investments

Exercise of Incentive Stock Options

Losses from Investment Ponzi Schemes

Chapter 9: Travel

Business Travel

Temporary Work Assignments

Conventions

Medical Travel

Charitable Travel

Moving for Work

Educational Travel

National Guard and Military Reservist Travel

Frequent Flier Miles

Recordkeeping for Travel Expenses

Chapter 10: Entertainment

Meals and Entertainment

Company Holiday Parties and Picnics

Sporting and Theater Events

Home Entertainment

Entertainment Facilities and Club Dues

Recordkeeping for Meals and Entertainment Expenses

Gambling Losses

Chapter 11: Real Estate

Vacation Home

Home Office

Rentals

Low-Income Housing Credit

Rehabilitation Credit

Deduction for Energy-Efficient Commercial Buildings

Special Breaks for Certain Disaster Victims

Chapter 12: Borrowing and Interest

Home Mortgage Interest

Student Loan Interest

Investment-Related Interest

Business Interest

Accrued Interest on Bond Purchases

Below-Market Loans

Bad Debts

Chapter 13: Insurance and Catastrophes

Casualty and Theft Losses

Disaster Losses

Disaster Relief Payments

Damages

Disability Coverage

Accelerated Death Benefits

Legal Fees

Appraisal Fees

Chapter 14: Your Job

Making Work Pay Credit

Job-Hunting Expenses

Dues to Unions and Professional Associations

Work Clothes and Uniforms

Subscriptions to Professional Journals and Newsletters

Work Tools and Equipment

Miscellaneous Job-Related Expenses

Home Office Deduction

Prizes and Awards

Performing Artists

State or Local Government Officials Paid on a Fee Basis

Repayment of Supplemental Unemployment Benefits

Jury Duty Pay Turned Over to Your Employer

Impairment-Related Expenses

Military Benefits

Fringe Benefits

Income Earned Abroad

Chapter 15: Your Business

Start-Up Costs

Equipment Purchases

Payment for Services

Supplies

Gifts

Hobby Losses

Self-Employment Tax Deduction

Home Office Deduction

Farming-Related Breaks

Domestic Production Activities Deduction

Other Business Deductions

Making Work Pay Credit

Other Business Credits

Net Operating Losses

Chapter 16: Miscellaneous Items

State and Local Income Taxes

State and Local Sales Taxes

Certain Federal Taxes

Tax Refunds

Tax Preparation Costs

Tax Audits

Legal Fees

Gifts You Receive

Inheritances

Life Insurance Proceeds

Estate Tax Deduction on Income in Respect of a Decedent

Rebates and Discounts

Government Benefits

Alternative Minimum Tax

Appendix A: Items Adjusted Annually for Inflation

Appendix B: Checklist of Tax-Free Items

Appendix C: Checklist of Nondeductible Items

Index

J.K. LASSER'S™

1001 DEDUCTIONS AND TAX BREAKS 2011

Look for these and other titles from J.K. Lasser™—Practical Guides for All Your Financial Needs

J.K. Lasser's Small Business Taxes by Barbara Weltman

J.K. Lasser's New Tax Law Simplified by Barbara Weltman

Copyright © 2011 by Barbara Weltman. All rights reserved.

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Introduction

Say the word "taxes" and most people groan. There are good reasons for this response: First of all, the cost of paying your taxes annually can be a financial burden. You may feel taken to the cleaners every time you view your paycheck after withholding for federal income taxes (not to mention state income taxes as well as Social Security and Medicare taxes).

Second, the tax law is very complicated and changing all the time. The federal tax rules grew from 400 pages in 1913 to more than 80,000 in 2009; this doesn't count the massive changes made by health care reform and other legislation in 2010. Congress changes the tax law to a greater or lesser extent every single year—and this year is no exception! In addition, new court decisions and IRS rulings appear each day, providing guidance on how to interpret the law.

Third, you have to know what the tax rules are and can't claim ignorance to avoid taxes and penalties. Even if you use a tax professional or tax preparation software to prepare your return, you remain responsible for your taxes. The Tax Court has noted that using software is not an automatic excuse to avoid underpayment penalties.

How can you combat the feeling of dread when it comes to taxes? It helps to know that the tax law is peppered with many, many tax breaks to which you may be entitled. These breaks allow you to not report certain economic benefits you enjoy or to subtract certain expenses from your income or even directly from your tax bill. As the famous jurist Judge Learned Hand once stated (in the 1934 case of Helvering v. Gregory in the Court of Appeals for the Second Circuit):

Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike, and all do right it for nobody owes any public duty to pay more than the law demands.

So get your tax affairs in order and reduce what you pay each year to Uncle Sam!

In getting a handle on how to do this by taking advantage of every tax break you may be entitled to without running afoul of the Internal Revenue Service (IRS), there are some simple rules to keep in mind. They include:

You must report all of your income unless a specific law allows you to exclude or exempt it (so that it is never taxed) or defer it (so that it is taxed at a later time).You can claim deductions only when and to the extent the law allows. Deductions are referred to as a "matter of legislative grace"; Congress doesn't have to create them and does so only for some purpose (for example, to encourage economic activity or to balance some perceived inequity in the tax law).Tax credits are worth more than tax deductions. A credit reduces your tax payment on a dollar-for-dollar basis; a $1,000 credit saves you $1,000 in taxes. A deduction is worth only as much as the top tax bracket you are in. Suppose you are in the 28 percent tax bracket, which means this is the highest rate you pay on at least some of your income. If you have a $1,000 deduction, it is worth $280 (28 percent of $1,000) because it saves you $280 in taxes you would otherwise have to pay.Even if your income is modest, you may have to file Form 1040 (the so-called "long form"), rather than a simplified return (Form 1040A or 1040EZ), in order to claim certain tax benefits.In a number of cases, different deduction rules apply to the alternative minimum tax (AMT), a shadow tax system that ensures you pay at least some tax if your regular income tax is lower than it would have been without certain deductions.

Whether you prepare your return by hand (as 18 percent of filers do), use computer software or an online solution (22 percent), or rely on a professional (60 percent), this book is designed to tell you how to get every tax edge you're entitled to. Knowing what to look out for will help you plan ahead and organize your activities in such a way that you'll share less of your hard-earned money with Uncle Sam.

Tax-Favored Items

There are five types of tax-advantaged items receiving preferential or favorable treatment under the tax law:

1.Tax-free income—income you can receive without any current or future tax concerns. Tax-free income may be in the form of exclusions or exemptions from tax. In many cases, tax-free items do not even have to be reported in any way on your return.

2.Capital gains—profits on the sale or exchange of property held for more than one year (long-term). Long-term capital gains are subject to lower tax rates than the rates on other income, such as salary and interest income, and may even be tax free in some cases. Ordinary dividends on stocks and capital gain distributions from stock mutual funds are taxed at the same low rates as long-term capital gains.

3.Tax-deferred income—income that isn't currently taxed. Since the income builds up without any reduction for current tax, you may accumulate more over time. However, at some point the income becomes taxable.

4.Deductions—items you can subtract from your income to reduce the amount of income subject to tax. There are two classes of deductions: those "above the line," which are subtracted directly from gross income, and those "below the line," which can be claimed only if you itemize deductions instead of claiming the standard deduction (explained later).

5.Credits—items you can use to offset your tax on a dollar-for-dollar basis. There are two types of tax credits: one that can be used only to offset tax liability (called a "nonrefundable" credit) and one that can be claimed even if it exceeds tax liability and you receive a refund (called a "refundable" credit). Usually you must complete a special tax form for each credit you claim.

This book focuses on three types of tax-favored items: exclusions (tax-free income), deductions, and credits.

Limits on Qualifying for Tax-Favored Items

In many cases, eligibility for a tax benefit, or the extent to which it can be claimed, depends on adjusted gross income (AGI) or modified adjusted gross income (MAGI).

Adjusted gross income is gross income (all the income you are required to report) minus certain deductions (called "adjustments to gross income"). Adjustments or subtractions you can make to your gross income to arrive at your adjusted gross income are limited to the following items:

Alimony payments

Archer Medical Savings Accounts (MSAs) (for accounts set up prior to 2008)

Business expenses

Capital loss deductions of up to $3,000

Domestic production activities deduction

Educator expenses up to $250

Forfeiture-of-interest penalties because of early withdrawals from certificates of deposit (CDs)

Health Savings Account (HSA) contributions

Individual Retirement Account (IRA) deductions

Jury duty pay turned over to your employer

Legal fees for unlawful discrimination claims

Moving expenses

Net operating losses (NOLs)

One-half of self-employment tax

Performing artist's qualifying expenses

Qualified retirement plan contributions for self-employed individuals

Rent and royalty expenses

Repayment of supplemental unemployment benefits required because of the receipt of trade readjustment allowances

Self-employed health insurance deductions

Simplified employee pension (SEP) or savings incentive match plan for employees (SIMPLE) contributions for self-employed individuals

Student loan interest deduction up to $2,500

Travel expenses to attend National Guard or military reserve meetings more than 100 miles from home

Tuition and fees deduction up to $4,000

Alert

The above-the-line deductions for educator expenses and tuition and fees expired at the end of 2009. Check the Supplement to see whether they have been extended for 2010.

Figuring AGI may sound complicated, but in reality it's merely a number taken from a line on your tax return. For example, AGI is the figure you enter on line 37 of the 2010 Form 1040, line 21 of the 2010 Form 1040A, or line 4 of 2010 Form 1040EZ.

Modified adjusted gross income is merely AGI increased by certain items that are excludable from income and/or certain adjustments to gross income. Which items are added back varies for different tax breaks. For example, the MAGI limit on eligibility to claim the student loan interest deduction is AGI (disregarding the student loan interest deduction) increased by the tuition and fees deduction as well as the exclusion for foreign earned income and certain other foreign income or expenses. All of these items are explained in this book.

Standard Deduction versus Itemized Deductions

Every taxpayer, other than someone who can be claimed as a dependent on another taxpayer's return, is entitled to a standard deduction. This is a subtraction from your income, and the amount you claim is based on your filing status. Table I.1 shows the standard deduction amounts for 2010.

TABLE I.1 Standard Deduction Amounts for 2010

Filing StatusStandard DeductionMarried filing jointly$11,400Head of household8,400Single (unmarried)5,700Qualifying widow(er) (surviving spouse)11,400Married filing separately5,700

In addition to the basic standard deduction, certain taxpayers can increase these amounts. An additional standard deduction amount applies to those age 65 and older and for blindness. For 2010, the additional amount is $1,400 for individuals who are not married and are not a surviving spouse and $1,100 for those who are married or a surviving spouse.

Example

In 2010, you are single, age 68, and shape not blind (and do not own a house and did not buy a car this year). Your standard deduction is $7,100 ($5,700 + $1,400).

You may also add to the basic standard deduction real estate taxes up to $500 for singles and $1,000 for joint filers and disaster losses.

Alert

The additions to the standard deduction for real estate taxes and disaster losses expired at the end of 2009. Check the Supplement to see whether they have been extended for 2010.

Instead of claiming the standard deduction, you can opt to list certain deductions separately (i.e., itemize them). Itemized deductions include:

Medical expenses

Taxes

Interest payments

Gifts to charity

Casualty and theft losses

Unreimbursed employee business expenses

Investment expenses

Legal fees to earn income

Gambling losses

Estate tax payments on income in respect of decedents

You cannot claim any additional standard deduction that applies to those 65 or older and/or blind if you choose to itemize deductions in lieu of claiming the basic standard deduction amount.

Generally, claim the standard deduction when it is greater than the total of your itemized deductions. However, it may save overall taxes to itemize, even when total deductions are less than the standard deduction, if you are subject to the alternative minimum tax (AMT). The reason: The standard deduction cannot be used to reduce income subject to the AMT, but certain itemized deductions can.

If a married couple files separate returns and one spouse itemizes deduction, the other must also itemize and cannot claim a standard deduction.

Impact of Deductions on Your Chances of Being Audited

Did you know that the IRS collects statistics from taxpayers to create profiles of average deductions? If you claim more than the average for your income range, the computer may select your return for further examination.

Table I.2 shows the average itemized deductions for taxpayers in various adjusted gross income (AGI) ranges.

TABLE I.2 Average Itemized Deductions for 2008*

Tax experts agree that you should claim every deduction you are entitled to, even if your write-offs exceed these statistical ranges. Just make sure to have the necessary proof of your eligibility and other records you are required to keep in case your return in examined.

How to Use This Book

The chapters in this book are organized by subject matter so you can browse through them to find the subjects that apply to you or those in which you have an interest.

Each tax benefit is denoted by an icon to help you spot the type of benefit involved:

Exclusion

Above-the-line deduction

Itemized deduction (a deduction taken after figuring adjusted gross income)

Credit

Other benefit (e.g., a subtraction that reduces income)

For each tax benefit you will find an explanation of what it is, starting with the maximum benefit or benefits you can claim if you meet all eligibility requirements. You'll learn the conditions or eligibility requirements for claiming or qualifying for the benefit. You'll find both planning tips to help you make the most of the benefit opportunity as well as pitfalls to help you avoid problems that can prevent your eligibility. You'll see where to claim the benefit (if reporting is required) on your tax return and what records you must retain to support your tax position.

You'll find hundreds of examples to show you how other taxpayers have successfully taken advantage of the benefit. Over the years, taxpayers have been able to write off literally thousands of items; not every one is listed here because space does not allow it. And you'll learn what isn't allowed even though you might otherwise think so. There are references to free IRS publications on a variety of tax topics that you can download from the IRS web site (www.irs.gov) or obtain free of charge by calling 800-829-1040. Also included are titles of other J.K. Lasser books on various topics throughout this book.

In the appendices, you'll find a listing of items that can be adjusted each year to reflect cost-of-living changes so you can plan ahead, as well as a checklist of items that are tax free and a checklist of items that are not deductible.

At the time this book went to press, there were several tax bills before Congress. These bills would extend for 2010 returns various provisions that expired at the end of 2009 as well as make other changes affecting tax returns in 2010 and later years. Throughout the book you will find alerts to possible changes to come. For a free update on tax developments, look for the Supplement to this book in February 2011, by going to www.jklasser.com, as well as to my web site, www.barbaraweltman.com (and click on "tax articles"). For more information, and to learn about the newest deductions and other tax breaks, visit www.jklasser.com, your 365-day-a-year tax resource.

Chapter 1

You and Your Family

Do the old clichés still ring true? Can two still live as cheaply as one? Are things really cheaper by the dozen? For tax purposes, there are certain tax breaks for building a family.

This chapter explains family-related tax benefits, including:

Personal exemptionDependency exemptionChild tax creditEarned income creditDependent care creditAdoption costsFoster careChild supportAlimony

For more information on these topics, see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information; IRS Publication 503, Child and Dependent Care Expenses; IRS Publication 504, Divorced or Separated Individuals; IRS Publication 596, Earned Income Credit; and IRS Publication 972, Child Tax Credit.

Personal Exemption

Each taxpayer (other than someone who is another taxpayer's dependent) automatically is entitled to a deduction just for being a taxpayer. The amount of the deduction, called the exemption amount, is a fixed dollar amount ($3,650 in 2010). However, if a taxpayer is considered to be a “high-income taxpayer,” he or she loses some or all of this deduction.

Benefit

You can claim a deduction for yourself, called a personal exemption. In 2010, the exemption amount is $3,650 (each year it is indexed for inflation). Table 1.1 shows you the value of your personal exemption for your tax bracket in 2010 (the amount of taxes you save by claiming it).

TABLE 1.1 Value of Your Personal Exemption in 2010

Your Top Tax BracketValue of Your Exemption10%$ 36515%54825%91328%1,02233%1,20535%1,278

Conditions

There are no conditions to claiming this deduction; it's yours because you are a taxpayer and the law says you are entitled to it.

Each spouse is entitled to his or her own personal exemption. On a joint return, two personal exemptions are claimed. If you are married but file a separate return, you can claim both deductions (an exemption for you and an exemption for your spouse) if your spouse has no income and is not the dependent of another taxpayer.

However, you cannot claim the personal exemption if you can be claimed as a dependent on another taxpayer's return. For example, a child who is the parent's dependent cannot claim a personal exemption on the child's own return.

Planning Tips

If a parent waives a dependency exemption for a child, the child can then claim the exemption on his or her own return (the child is no longer treated as a dependent). This may be advisable, for example, when the parent cannot use an education credit because the parent's income is too high, but the child can use the credit to offset his tax liability (see Chapter 3).

You cannot claim any personal or dependency exemption for alternative minimum tax (AMT) purposes, a shadow tax system designed to ensure that all taxpayers pay at least some tax. A large number of exemptions can substantially reduce or even eliminate any regular tax. So if you have a large number of exemptions, you may trigger or increase AMT liability. You may wish to engage in some tax planning to minimize or eliminate your AMT liability.

Where to Claim the Personal Exemption

You claim the exemption directly on your tax return in the “Tax and Credits” section of Form 1040 or the “Tax, Credits and Payments” section of Form 1040A; no special form or schedule is required. If you are filing Form 1040EZ, the exemption amount is built into the tax table (you can file this return only if you are single or married filing jointly with no dependents); you don't have to subtract it anywhere on the return.