Though the tax-filing deadline is near, there’s no need to panic. You still have time to employ some smart strategies and avoid common problems and hassles. The tax experts at Grant Thornton provide the following suggestions and reminders.
Look Here for Additional Deductions
Paid real property taxes. Congress extended a new deduction for non-itemizers on real property taxes of up to $500 for singles and $1,000 for married couples filing jointly. If you don’t itemize your deductions but paid real property taxes, don’t forget this deduction.
Your new car. “Cash-for-clunkers” stole all the press, but don’t forget about the new deduction for state and local sales tax on new-car purchases made between Feb. 17 and the end of 2009. The deduction is allowed for taxes on the first $49,500 of the car’s price, and the income limit is unusually high for this type of targeted benefit. The deduction phases out beginning at income levels of $125,000 for individuals and $250,000 for joint filers.
Home improvements. The February stimulus bill revitalized the energy-efficient home improvement tax credit. For 2009, you are entitled to a 30% credit of up to $1,500 for installing energy-efficient insulation, windows, roofs, fans, furnaces and water heaters.
Paid tuition. February’s stimulus bill enhanced the HOPE credit and renamed it the American Opportunity Credit for 2009 and 2010. The 2009 version features a higher income phaseout ($80,000 to $90,000 for singles and $160,000 to $180,000 for joint filers), an increased maximum credit of $2,500 and 40% refundability.
Moves You Can Still Make to Reduce 2009 Taxes
Contribute to an IRA. Contribute to your IRA anytime before April 15 and get an above-the-line deduction on your 2009 return. If you don’t have one, set one up. Contribution limits for 2009 are $5,000 plus a $1,000 “catch up” for those 50 and over. Contributions offer deductions only at income levels below $109,000 for joint filers and $65,000 for singles.
Contribute to an HSA. If you were covered by a “high deductible” health plan in 2009, you have until April 15 to contribute to a Health Savings Account (HSA) and deduct it from your 2009 return. Limited to $3,000 for individuals and $5,950 for families, plus a $1,000 “catch up” for those 55 and over.
Buy a home. If you buy a house in 2010 that qualifies you for the homebuyer credit, you can claim it on your 2009 return. The credit offers up to $8,000 for “first-time homebuyers” who have not owned a principal residence in the past three years or $6,500 for “long-time residents” who have owned a home that is their principal residence for five of the past eight years. The home purchase contract must be in place by April 30, 2010, and the home must be purchased by June 30. If your income is above the level where the credit begins to phase out ($125,000 for singles and $225,000 for joint filers for purchases after Nov. 6, 2009), consider helping someone else in the family who may qualify. But watch out for the anti-abuse rules and remember that the house can’t cost more than $800,000.
Make charitable contributions to help Haiti. Congress acted quickly to allow taxpayers to accelerate deductions for charitable contributions made to Haiti earthquake relief programs. Cash contributions made before March 1, 2010, can be claimed on your 2009 tax return. The new law also allows taxpayers to substantiate deductions made by text message with a copy of their phone bill.
Watch Out for 2009 Return Surprises
Under-withheld but no penalty due? Last February’s stimulus bill offered a credit of up to $400 for singles and $800 for joint filers. The IRS changed the withholding tables so the value of the credit could be delivered during the year through reduced withholding. This means taxpayers who ultimately will not qualify for the credit may not have had enough tax withheld. This problem could affect taxpayers with spouses or second jobs that push them over the credit’s income limit, but it is more likely to affect taxpayers with pension income that doesn’t qualify as “earned” income for the credit. The IRS has said it will not apply underpayment penalties in these cases, so make sure you don’t pay any penalty you shouldn’t.
Expanded “kiddie tax.” The “kiddie tax” was expanded in recent years so that it applies to full-time students under the age of 24 and all children 18 and younger. If the income from these children does not represent at least one-half of their support, some of their investment income may have to be taxed at your marginal rate.
Tips to Help You Avoid Hassles and Mistakes
File electronically. Filing electronically not only speeds up your refund and saves you some postage but helps you spot and correct errors. Before the IRS accepts an electronic return, it checks it for a few common errors. If one is spotted, the IRS will alert you and give you the opportunity to correct it before t’s processed.
Check your numbers twice. Avoid math errors and make sure to get your Social Security numbers right. IRS computers automatically match all Social Security numbers and check for simple math mistakes. If you wrote down the wrong Social Security number for one of your dependents, the IRS will disallow the dependent, recalculate the return and usually send you a brand-new tax bill.
Get your charitable house in order. A charitable cash contribution must be documented to be deductible. Remember, you cannot deduct donations to individuals, social clubs, political groups or foreign organizations. But you can get a deduction of up to 14 cents a mile driven in service of a charitable organization.
Smart Moves for 2010
Roll into a Roth. The $100,000 income limit on rollovers into Roth IRAs disappeared in 2010. You can roll over into a Roth IRA from either a traditional IRA or a qualified retirement plan such as a 401(k), 403(b) or 457 plan, and you will pay taxes on the investments immediately in exchange for no taxes at withdrawal. Why pay tax now when you can defer? Tax rates are scheduled to go up, and the tax on your rollover may be low now if the economic downturn has depressed the value of your investments. Plus, Roth IRAs have no required minimum distributions.
Realize gains. Tax rates are scheduled to increase in 2011. Although many lawmakers have pledged to extend some of the current tax cuts, taxes could increase in higher tax brackets and for capital gains and dividends. Depending on how the legislative outlook develops this year, it may make sense to reverse your normal tax strategy in 2010 by accelerating income and deferring deductions to take advantage of current low rates. If this strategy includes recognizing gain on business assets, you may want to begin exploring your options early in the year.
This article originally appeared in The Business Owner Journal, the periodical of choice for owners of small and midsize private businesses. All rights reserved, D.L. Perkins LLC. © 2012.
This publication is intended to provide general information on the subject matters covered. It is sold and distributed with the understanding that neither the publisher nor any distributor or advertiser is engaged in providing legal, tax, insurance, investment or other professional advice. The advice of a qualified professional should be sought before any reader applies a concept presented herein to his or her particular situation or business.
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