Five Tax Season Tips
This content is provided courtesy of SavvyMoney.
Have you heard the news? It's tax season.
That's a bit of a joke - I'm sure you're well aware. Some of you are even early birds who have already filed. Surveys show you're more likely to fall in this category if you're due a refund (why we need a survey to prove this point, I'll never know. The fact that people scramble to get money back, but put off filing if they owe cash to the IRS, seems like a no-brainer to me).
If you're in the camp that's planning to procrastinate until the last minute, I'm here to give you a push in the form of some tips to make the filing process smooth, if not painless.
1. Grab your deductions. A few that are commonly missed: state sales tax, which is most likely to help you if you live in a state that doesn't levy an income tax (if your state has an income tax, you must choose between the two, and in most cases, the income tax deduction will be more lucrative). Student loan interest is another big one. Finally, if you pay for child care so you can go to work, make sure you take the child-care credit, which is worth up to 35% of your out-of-pocket costs. A credit is better than a deduction because it cuts your tax bill dollar for dollar.
2. Take advantage of job hunting perks. If you were unemployed in 2011 and spent a good chunk of money searching for a new job, the IRS may let you write-off those costs if you itemize them as a miscellaneous expense. Things like recruitment fees, the cost of printing and mailing your resume, travel expenses, resume prep services, and job counseling can all be deductible. How this works: the deduction is the amount of your total miscellaneous expenses - which also includes things like unreimbursed employee expenses and tax preparation services - that exceeds 2% of your adjusted gross income (which may be low, if you were out of work for a long time, so this bar isn't as hard to clear as you might think). You must be looking for a job in the same occupation. If this is a career change, or your first job, it doesn't count.
3. Acknowledge life changes. If you bought a home, for instance, you'll be able to deduct mortgage interest, which may push you away from the standard deduction and into itemizing. Itemizing opens up a whole new world of deductions, like the job hunting one mentioned above and charitable contributions. A new baby? Aside from a lot of joy, you're due an exemption of $3,700 (that's per dependent), as well as the Child Tax Credit, worth up to $1,000 per child.
4. Get rid of the pencil and paper. You'll miss likely miss deductions - and miscalculate, even if you're a math wiz - if you don't use some electronic program. Turbo Tax is a good one, and they're now offering one-on-one expert advice by phone or live chat. Or go all in and hire a person (I prefer a CPA or enrolled agent) to help you.
5. Save for retirement. You have until April 17, 2012 to contribute up to $5,000 ($6,000 if you're 50 or older) to a traditional IRA or a Roth IRA. To qualify for the full traditional IRA deduction, you must have an adjusted gross income of $56,000 or less ($89,000 or less if you're married filing jointly). If you're ineligible to contribute to an employer plan, your contribution is deductible no matter what your AGI is (and if your spouse is eligible for a company plan but you're not, you can make a fully-deductible contribution if your combined gross income isn't more than $167,000). Roth IRA contributions aren't deductible, but withdrawals in retirement are completely tax-free.