Are you the type of person who waits until the 2nd week of April every year to even look at your taxes? Millions are. Or are you the kind of person that sends their information to a tax professional at the last minute and hopes for the best? Ive been there too. Well, if you are looking to be better prepared this year, here are some tips for you to make filing your taxes a little less, well, taxing. (Sorry about that pun)
Commonly Missed Deductions:
State-tax refunds for AMT taxpayers
As long as the amount of your refund is less than the amount of income tax disallowed under Alternative Minimum Tax (AMT), state tax refunds aren't taxable.
Environment Friendly Home Credit
If you install energy friendly windows, solar hot water heaters, geothermal heat pumps, wind turbines, and roofing that have been approved for low-energy you may qualify for a 30% credit (maximum of $500 for 2011). Helping the environment can be helpful to your wallet.
Car Insurance
You can include your car insurance as a deduction on your federal return. If you use your car for work you can deduct for oil, tires, licenses, and the insurance premium itself. If you choose not to deduct any of the previously listed items, you can deduct mileage, but you cant do both.
Health Insurance
Deduct your health-care insurance premiums on your federal return. If you are self-employed it is possible for you to deduct 100% of your health-care costs, as well as those of your spouse and dependents. However, if you have a health insurance, you will not be able to deduct it.
The American Opportunity Credit
This is a tax credit for people paying college tuition. It is good for up to $2500. Extended through 2012, this credit is available for individuals whose modified adjusted gross income is equal to or less than $80,000.
Common Audit Triggers:
Large Mortgage Interest Deductions
Typically anything over $50,000 will get the IRSs attention. Taxpayers are allowed to deduct mortgage interest on a loan of up to $1 million, which usually comes out to $50,000 (5%). Deducting the maximum amount allowed is a common audit trigger for the IRS.
Rental Real Estate Losses
This is a common red flag for taxpayers who claim to be professionals in real estate because the losses are then deductible against ordinary income. Filing as a real estate professional, which often requires 750 hours of work to qualify for, can be something the IRS is suspicious of. Given the current housing market, many taxpayers are losing money on rental properties, but do not qualify as real estate professionals and therefore do not qualify for the tax break associated with it.
Homebuyer tax credit
Beginning in 2008, Congress has passed three different versions of this stimulus bill. Through the research of official watchdogs, it was found that the initial bill prompted quite a bit of fraud. In the current form, Congress requires a more stringent documentation as proof of qualification.
Common Human Errors:
Overstating Charitable Work
If you attend a charity dinner with $500 plates, you can only deduct a portion of that plate. This is the case with all charitable activity. Any foundation is required to inform you of this rule. So check those letters you get from them.
Omitting Payments On interest
Many people forget about the small amounts of interest they pay throughout the year. This is largely attributed to the fact that banks and other institutions arent required to provide a 1099 form for amounts less than $10. These small amounts are still taxable income and must be reported. Any unreported income may be noticed by the IRS computer and may lead to further investigation.
Mortgage Deductions
Often, taxpayers miscalculate the mortgage points they deduct. For the first mortgage on a home, the mortgage fees are deductible. When refinancing the points must be amortized and then can be deducted over the life of the loan.
When filing your taxes, first, I recommend hiring a
tax attorneyl. Short of that, its important to remain organized with your receipts and possible deductions throughout the yearnot just in April.
