Tax Credits and
Deductions To Take For
The Tax Year 2011
Personal Thoughts On Our Tax Code
According to former Treasury Secretary, Paul O’Neill, “…the complexity of our
Tax Code is the worst problem facing our society”. According to the IRS, we
spend more than six billion hour each year trying to comply with our present
Tax Code and if you are an average American taxpayer, you will spend more
time working to pay your taxes than you spend working to provide your family
food, clothing and shelter
combined.
I am a believer in paying your fair share of taxes. However, each year our Tax
Code changes and new rules and regulations are set in place for another year.
Am I upset with the IRS?… NO!
The IRS does not write the Tax Code, it is Congress that we all should be upset
with. These elected official are the ones that had created this nightmare for
every American taxpayer.
One of the best ways of paying for the cost of a college education, reduce
debt, increase income, or save for retirement is to start or run your own
business.
Another way is to take advance of tax credits and deductions that are give to
many taxpayers each year.
Today it is almost impossible to raise a family and provide a college education to
children without both parents working. Of course, the more you make the more
taxes you will pay to the federal and state taxing authorities.
According to the Tax Foundation, “Individuals that have earned income and
pays taxes, will pay more in taxes than they pay for food, clothing, and
shelter combined.”
No one likes paying taxes. However, taxes must be paid in order to provide
NECESSARY services to the general society, such as defense, roads, and other
items that benefit the majority of the nation’s citizenry. Our tax system WAS
NOT established to be used as a social welfare system. However, according to
the Tax Foundation and other tax think tanks, most of our tax dollars are used to
provide social benefits (Social Security, Medicare, Medicaid, Welfare, College
Financial aid etc.). Many individuals feel that these social benefits are
necessary in our society today.
Regardless of your position, individuals should only pay their FAIR SHARE and
no more.
Since most individuals are W-2 wage earners there is very little you can do to
control the amount of taxes that you will pay. In this publication we will cover
often overlooked deductions and credits and you just might be able to pay less
money to the IRS.
The tax information in this publication is a summation of many tax deduction and
credit that were recently passed. Keep in mind that the following information
is only an overview of the changes that are available to most taxpayers. It
should be used primarily to assist the reader in understanding the tax law
changes. Before using any of the information, the reader should consult with
their accountant or CPA.
When general prices rise, the IRS nudges up some of its tax limits. Here are a
few changes for the tax year 2011.
In 2011, personal exemptions and standard deductions went up and tax brackets
widened due to inflation, according to the Internal Revenue Service.
These inflation adjustments relate to eight tax provisions that were either
modified or extended by the Tax Relief, Unemployment Insurance
Reauthorization and Job Creation Act of 2010 that became law on Dec. 17. New
dollar amounts affecting 2011 returns, filed by most taxpayers in early 2012,
include the following:
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The value of each personal and dependent exemption, available to
most taxpayers, is $3,700, up $50 from 2010.
The new standard deduction is $11,600 for married couples filing a joint
return, up $200, $5,800 for singles and married individuals filing
separately, up $100, and $8,500 for heads of household, also up $100.
The additional standard deduction for blind people and senior citizens is
$1,150 for married individuals, up $50, and $1,450 for singles and heads
of household, also up $50. Nearly two out of three taxpayers take the
standard deduction, rather than itemizing deductions, such as mortgage
interest, charitable contributions and state and local taxes.
Tax-bracket thresholds increase for each filing status. For a married
couple filing a joint return, for example, the taxable-income threshold
separating the 15-percent bracket from the 25-percent bracket is $69,000,
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up from $68,000 in 2010.
The maximum earned income tax credit (EITC) for low and moderate
income workers and working families rises to $5,751, up from $5,666 in
2010. The maximum income limit for the EITC rises to $49,078, up from
$48,362 in 2010.The credit varies by family size, filing status and other
factors, with the maximum credit going to joint filers with three or more
qualifying children.
The modified adjusted gross income threshold at which the lifetime
learning credit (college tax credit), begins to phase out is $102,000 for
joint filers, up from $100,000, and $51,000 for singles and heads of
household, up from $50,000.
Several tax benefits are unchanged in 2011. For example, the monthly
limit on the value of qualified transportation benefits (parking, transit
passes, etc.) provided by an employer to its employees, remains at $230.
Cost-basis reporting by brokers: As of 2011, brokers must track clients'
purchases of stock, real-estate investment trusts and foreign securities,
and then report the original cost to the IRS when the asset is sold. This is
an effort to improve tax compliance by investors. The rules for investments
in mutual funds, bonds, options and many exchange-traded funds.
Details on these inflation adjustments can be found in Revenue Procedure
2011-12.
On the next pages are some other tax changes that could affect your 2011
tax liability.
IRA/Roth Conversion: You have until the tax-filing deadline (April 17, 2012) to
contribute up the lesser of your taxable compensation for the year or $5,000 to a
2011 IRA ($6,000 if you are 50 or older). If you are self-employed, have a Keogh
or SEP-IRA, and file for an extension to October 15, you can wait until then to put
2011 money into those accounts.
If you are covered by a retirement plan at work, you can deduct some or all of
your IRA contribution. The limits have increased for tax year 2011 modified
adjusted gross income (AGI) as follows:
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More than $92,000 but less than $112,000 for a married couple filing a
joint return or a qualifying widow(er)
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More than $58,000 but less than $68,000 for a single individual or
head of household, or
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Less than $10,000 for a married individual filing a separate return.
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If your spouse is covered by a retirement plan at work but you are
not, your deduction is phased out if your modified AGI is more than
$173,000 but less than $183,000. If your modified AGI is $183,000 or
more, you cannot take a deduction for contributions to a traditional
IRA.
Roth IRA conversion: The income limit for Roth conversions was permanently
removed, but taxpayers who converted to Roth IRAs in 2011 no longer have the
option of deferring conversion income into later years, as was true for 2010
conversions.
Itemized deductions and personal exemptions: The itemized deduction
limitation is repealed for 2011 (and through 2012). This means that taxpayers
can deduct the full amount of their itemized deductions in 2011. The personal
exemption phase-out rules also do not apply through 2012.
Tax Credits Are Better Than Tax Deductions
The reasons a tax credit is better than a tax deduction, is because they lower
your taxes dollar for dollar, instead of being calculated based on your tax
bracket.
Important Note: Making Work Pay credit is not available for the tax year 2011.
The Child Tax Credit is up to $1,000 for each qualifying child who was under the
age of 17 at the end of 2011. This credit can be claimed in addition to the credit
for child and dependent care expenses. For married taxpayers filing a joint
return, the phase-out begins at $110,000. For married taxpayers filing a separate
return, it begins at $55,000. For all other taxpayers, the phase-out begins at
$75,000. For More Details Read IRS Publication 972.
The Earned Income Tax Credit is a refundable credit. A refundable tax credit is
a credit given even if your credit exceeds your tax liability, you don't lose the
excess and are entitled to receive any overage as a refund. The Earned Inocme
Tax Credit is available for married couples filing jointly with 2011 earned income
under $49,078 and singles with income under $43,998. For More Details Read
IRS Publication 596.
The Child and Dependent Care Credit is calculated based on your expenses
paid for the care of your kids under age 13 to enable you to work or to look for
work in 2011. The credit is 20 percent to 35 percent of your child-care expenses,
up to $6,000 -- the size of your credit depends on your income. For More Details
Read IRS Publication 503.
The Retirement Savings Contributions Credit is designed to help low- and
moderate-income workers save for retirement. Individuals with incomes of up to
$28,250 and married couples with joint incomes of up to $56,500 may qualify for
a credit of up to $1,000 or up to $2,000 if filing jointly. For More Details Check
IRS Form 8880.
Energy and Appliance Tax Credit applies to taxpayers who made energyefficiency improvements to their homes in 2011. You may be eligible for a tax
credit of 10 percent for the cost, up to a maximum of $500. Approved
improvements include new windows, insulation, high efficiency furnaces, water
heaters and air conditioning, among many others, but you will need your receipts
and manufacturer certification as back-up.
College Tax Credits and Deductions
There are two federal tax credits available to help you offset the costs of higher
education for yourself or your dependents. The two tax credits are the American
Opportunity Credit and the Lifetime Learning Credit. To qualify for either
credit, you must pay qualified college expenses for yourself, your spouse or your
dependent. The credit may be claimed by the parent or the student, but not by
both. If the student was claimed as a dependent, the student cannot file for the
credit.
For more information read our e-book, “Understanding Educational Tax
Credits And Deductions”.
The American Opportunity Tax Credit: Each student can now get a $2,500
"higher education tax credit" for the first four years of college. The credit is based
on 100 percent of the first $2,000 of tuition and related expenses, including
books, paid during the tax year, plus and 25 percent of the next $2,000 of tuition
and related expenses paid during the tax year. In order to claim the full tax credit
your income must be under $80,000 for singles and $160,000 for joint filers. The
credit is fazed out once your income reaches $90,000 for singles and $180,000
for joint filers.
Lifetime learning credit: The credit can be up to $2,000 per eligible student and
is available for all years of post-secondary education and for courses that are
acquired in obtaining a degree or is used to improve job skills. The full credit is
generally available to eligible taxpayers who make less than $60,000 or
$120,000 for married couples filing a joint return.
Tuition and Fees Deduction: Every family can deduct up to $4,000 of college
tuition and fees in 2011. If your modified AGI is between $65,001 and $80,000 for
singles or if your income is between $130,001 and $160,000 filing a joint return,
you are entitled to a reduced deduction of up to $2,000. Check IRS Publication
970 for more information on educational tax credits and deductions.
Tax Deductions
According to the IRS, nearly two out of three taxpayers take the standard
deduction rather than itemizing deductions. Some individuals maybe leaving
money on the table. If your deductible expenses exceed the 2011 standard
deduction of $5,800 (up $100 from 2010) for singles and married individuals filing
separately and $8,500 for heads of household, also up $100 and $11,600 for
married couples filing jointly, be sure you itemize your deductions.
Miscellaneous deductions: These are deductible if they total more than 2
percent of your adjusted gross income. They include tax-preparation fees, jobhunting expenses, business car expenses and professional dues.
Sales tax: You can deduct sales tax paid in 2011 if the amount was greater than
the state and local income taxes you paid. If you claim the sales tax amount from
the IRS tables, you can add in tax paid on vehicles or boats purchased during the
year, except to the extent the sales tax rate on them is more than the general
sales tax rate. If you live in a state with a high income tax, like California or New
York, you will probably be better off claiming your state and local income taxes
rather than sales taxes. If you live in a state with no income tax, like Florida,
Texas, or Washington, be sure to take the sales tax deduction when you itemize.
Check with your professional tax advisor.
Medical expenses: Claiming medical expenses are very difficult because in
order to claim the deduction, your medical expenses must exceed 7.5% of your
adjusted gross income. Check IRS Publication 502 for more information.
Mileage: Deducting miles driven for work or other purposes can be a huge tax
break and save you significant money. The IRS has increased the mileage
deduction for 2011. According to the IRS, business mileage = 51 cents per mile
from January 1 to June 30, and 55.5 cents per mile from July 1 to December 31,
2011; medical and moving = 19 cents per mile from January 1 to June 30, and
23.5 cents per mile from July 1 to December 31, 2011; and charitable = 16 cents
per mile.
Mortgage insurance deduction: Borrowers with AGI's up to $100,000 may be
able to treat qualified mortgage insurance as home mortgage interest, which
means that 100 percent of 2011 premiums may be deductible. The insurance
contract had to be issued after 2006 and deductions are phased out in 10
percent increments for homeowners with AGI's between $100,001 and $109,000.
For More Information Check IRS Publication 936.
Enhanced adoption credits: As part of the Patient Protection and Affordable
Care Act (March 2010), the Adoption Tax Credit was extended one year until
Dec. 31, 2011, the amount of credit was increased to $13,360 and it was made
refundable, meaning that families can benefit even if they have less than $13,360
of federal income tax liability. If adoption expenses have been paid for by an
employer, you may qualify to exclude up to $13,360 from income. The credit is
subject to income phaseout from $185,210 to $225,210 in AGI. For More
Information Check IRS Topic 607.
Classroom deduction for teachers: K-12 educators who work at least 900
hours during the school year can claim an above-the-line deduction of up to $250
($500 if married filing joint and both spouses are educators, but not more than
$250 each) of any unreimbursed expenses. Qualified expenses include books,
supplies, computer equipment, related software/services/other equipment, and
supplementary materials used in the classroom. For More Information Check
IRS Topic 458.
Conclusion
You need to look at paying taxes in a new way. United State Treasury Secretary,
Paul O’Neill said at one time, “A fine is a tax for doing something wrong. A
tax is a fine for doing something right.” There are several tax deduction and
credit for W-2 wage earners. However, by starting some type of home base
business you could increase deductions and credits and potentially earn
additional tax favored income.
If you want to pay less tax and earn additional tax-free money, you need to get
out of the W-2 wage earner’s trap.
Senator Bill Bradley in 1984 said, “Our income tax system is overly complex.
It distorts investment decisions and encourages people to put money into
schemes to reduce their tax bills, instead of into enterprises to create jobs
and help our economy grow.”
This quote cannot be more truer, especially in today’s economic climate. By
setting up a home based business you can create additional income and reduce
your taxes and use the additional money to help pay for your children’s college
education, reduce debt, or save for retirement.
If you need help with college affordability or help with general money
management issues, give me a call and let’s talk.