Taxes 2011: Get Ready Now!
Usually people start worrying about their tax returns only when they get their W2 or April 15 gets closer. In both cases it is too late.
There is little left you can do to change your situation: getting a bigger refund or decreasing the amount of taxes you owe. Most people take the standard deduction vs. itemized deductions because they don’t know what expenses they can itemize. By the time they have to file, it is too late to take advantage of itemizing: they don’t have proper documentation or any evidence to support the deductions.
What you should do is to plan your tax strategy for next year as soon as the current year starts. There are plenty of tactics you can implement so you can get more money back or, at least, pay less. You probably do a lot of things anyway, like giving old clothes to Goodwill or paying tuition, but to file your taxes easily and worry free you need the proper paperwork, and that’s what you have to do throughout a year. If you haven’t done it yet, now it is good time to start.
First, you should analyze your last year’s tax return and decide if you are going to claim the same deductions and tax credits or if your situation has changed. Maybe you got married, had a baby, sent your kids to college, bought or sold a house, found a new job in a different state; all these and more can change the outcome of your tax return.
You should keep all documents supporting deductions and tax credits that you are going to claim on your tax return: bills, credit card statements, bank statements, invoices, mileage logs, canceled checks or any other proof of payments. The IRS requires you to keep all paperwork for at least three years. But don’t stop there. Create separate spreadsheets to track your expenses. For example, if you occur a lot of medical expenses that are going to exceed 7,5% of your AGI (adjusted gross income), create a spreadsheet just for medical expenses: copayments, deductibles, prescription, travel, mileage. You’ll thank me when it is time to file your taxes.
So, what can you do to pay less taxes?
I would recommend creating a separate spreadsheet to record the mileage you drive for different purposes, because a lot of this mileage is tax-deductible. The IRS requires a written record for your deductible mileage and that is where most tax payers have problems. The following types of mileage are tax-deductible:
- Travel for medical purposes – 19 cents per mile
- Travel in service for charitable organizations – 14 cents per mile
- Work-related travel - 51 cents per mile
If you itemize your deductions you can deduct all your charitable donations to qualified charitable organizations like: churches, Goodwill, Salvation Army etc. You can check the list of charitable organizations at www.irs.gov.
If you donate money do not donate cash, you must have evidence of your donation in the form of a cancelled check, bank statement, or payroll deduction. When you donate your old clothes, furniture, and other miscellaneous items, don’t forget the receipt. Most of charitable organizations will give you a blank receipt with a date on it, so you have the responsibility to estimate your donation. Make a list and take pictures of donated items. To estimate the cost of your donation you should use the fair market value for your items.
For any monetary contribution of $250 or more you need an official written acknowledgment from the organization. If your donation is a property, the acknowledgment has to describe and estimate the property value. If the property’s value is more than $500, you have to file a Form 8283. So, if you would like to donate all those clothes that have been accumulating for years in your garage, I recommend to donate small portion every month, keeping the value under $250.
There are two educational credits you can claim to offset your educational expenses.
Lifetime Learning Credit is a “permanent” credit that you can claim every year for qualified expenses paid for a student enrolled in eligible institution. You can claim 20% of your expenses, up to $2,000. To claim the credit, your MAGI (modified adjusted gross income) must be below $60,000 for single ($120,000 if married filing jointly).
Another useful credit is an American Opportunity Credit. It has been extended for 2011 and 2012 and I urge you to take advantage of this credit. You can return up to $2,500 of your qualified expenses dollar for dollar. This credit is available for students who are in their first four years of post secondary education and qualified expenses include not only tuition but also books, supplies and equipment. You may be eligible for up to $1,000 even if you owe taxes because 40% of this credit is refundable. The full credit is available to eligible taxpayers whose MAGI is below $80,000 for single ($160,000 for married couples filing a joint return).
Also you can claim the “tuition and fees deduction” (up to $ 4000) and the “student loan interest deduction” (up to $2,500), even if you don’t itemize your deductions. The bad thing is you cannot claim the tuition and fees deduction, and educational credits for the same student in the same year. Depending on your tax bracket you have to choose what is more beneficial for you
Medical expenses are tricky because to be able to claim this deduction, your medical expenses have to exceed 7,5% of your AGI (adjusted gross income). Medical expenses include: medical insurance, copayments, prescriptions, and travel for medical purposes, hospitals, dental, prescription glasses, etc; so it is important to have a detailed records for your expenses.
It is also important to understand that your medical expenses occur not when you receive the service but when you pay for it. So if you realize that you or your dependants have to go through an expensive treatment next year, try to pay your current medical bills next year as well.
For example, to reach my 7,5% floor I have to accumulate $8,000 of medical expenses. In 2012 I have to go through expensive medical treatment which will cost me $7,000. This year both of my children had to go to ER and bills for their treatments were $2,000. I called the hospital and explained that I couldn’t pay this amount at once so we set the payment plan of $50 a month starting in October. So I’ll pay only $150 in 2011 and I’ll have an option to pay the remaining balance of $1,850 in 2012. In this case I already know that my medical expenses for 2012 will be eligible for deduction so I can keep an eye on my paperwork.
Opening your business
Opening a new business can be extremely beneficial for you. You can be your own boss, work your schedule and do what you love. It also can help with your taxes. For example, if you run business from your home, like a day-care center, part of your mortgage can be tax deductible; if you drive the car for business purposes, all your car expenses can be tax deductible. You definitely should talk to a tax-expert before you open the business but possibilities are endless.
Buy a property/Sell a property/Rent a property
Even though the economy is tough real estate still remains one of the best investment opportunities. In addition to being a homeowner, buying a house also help you with taxes. The following expenses are tax-deductible:
- Mortgage interest
- Mortgage insurance premiums
- Real estate taxes
- Late payment charges
If you decide to sell your primary residence you may exclude up to $250,000 of your gain if you are single taxpayer ($500,000 for married, filing jointly). To take advantage of this rule you have to occupy the house as your primary residence for two years out of five years before the sale.
Sometimes it is more beneficial to rent your property than to sell it. Depending on how much you involve in renting your property you can deduct following expenses:
- Depreciation of your property
- Depreciation for furniture and appliances
- Travelling expenses to check your rental property
- Commissions paid to collect rent
- Rental company fees
- Repairs and improvements
- Cost of cancelling lease
You can deduct unreimbursed employee business expenses if they exceed 2% of your AGI. Again, you have to have proper paperwork to support your expenses. Typically you can deduct following expenses:
- Away-from-home travel expenses
- Employment agency fees
- Employment-related education
- Job-hunting expenses
- Office at home (limited)
- Professional and union dues
- Entertainment expenses
- Specialized work clothes and uniform
- Small tools and supplies
- Subscription to professional journals
If you found a new job and your new job location is at least 50 miles farther from your home than your previous job location was, you can deduct your moving expenses. You have to be employed for at least 39 weeks after your move (or 78 weeks if you are self-employed). Following expenses are tax-deductible:
- Transportation expenses (airfare, mileage, parking fees, tolls etc)
- Lodging expenses (one night at the old location and one night at the new location)
- Storage and transport of your household goods and personal property
- Costs of connecting or disconnecting utilities.
These are just a few of many possibilities to make sure you get as biggest refund as possible. Filing your taxes does not have to be a burden; if you are prepared and you know what to expect it can be something you’ll look forward to.