As we close in on the 2011 filing deadline for individual tax returns, make sure you aren't missing out on key credits and opportunities that could reduce your tax burden. For some of these, it may be too late to take advantage in 2011, but keep them in mind for 2012!
1 — Tax Tips for Married Couples and Same-Sex Couples
Since DOMA (Defense of Marriage Act) is still on the books, same-sex married couples are considered unmarried for federal tax purposes, regardless of state laws. Until this law is repealed, the federal tax advantages of filing jointly as a married couple are unavailable to same-sex married couples.
For example, when one (federally recognized) spouse earns all or most of the income, the higher-earning spouse's income is typically taxed at a lower rate, resulting in a lower tax bill. Also, because of the "marital deduction privilege," when one spouse dies, the surviving spouse can be left an unlimited amount free of estate taxes. While same sex couples cannot yet enjoy these tax benefits, they also don't have to…
Watch out for the "Marriage Penalty!" When both spouses earn healthy incomes, the married couple can end up with a bigger combined federal income tax bill than if they were still single. In this scenario, a married couple could benefit from filing separately. A same-sex couple that is considered married under state law could actually benefit tax wise from DOMA by being considered unmarried for federal tax purposes in this instance.
2 — Kids? Tax Tips for Adoption and Childcare
If you went through the process of adopting in 2011 (or are planning to in 2012) the IRS is allowing a refundable tax credit. You may also be eligible to claim an exemption for amounts paid to you, or for you by your employer, for adoption expenses under a qualified adoption assistance program.
Some qualified expenses include adoption fees; lawyer fees; travel, lodging, and meal expenses; and any other expense related to the process of adopting your child. The adoption credit is worth $12,650 in 2012, down from $13,360 in 2011.
Watch out for duplicating your claim. You cannot claim the tax credit and an exemption for the same expense.
If you have a young child in need of care while you, or you and your spouse, are looking for work or working, you may be entitled to a child care tax credit. The credit is calculated as a percentage of the expenses you paid to the person or business that took care of your child. The percentage is chosen based on your adjusted gross income.
3 — Tax Credits for Caring for Aging Parents
As the baby boomer generation ages, many of us will be caring for our aging parents in some capacity. There is help from the IRS in the form of tax exemptions. You or your significant other can claim an elderly parent or step-parent as a dependent as long as that person lived with you for the duration of the last year and was considered a member of your household. In 2011, the exemption is worth $3,700.
Watch out for your dependent's income. The gross income must be less than the amount of the exemption you are claiming. This includes social security and pension benefits.
Credits & Positive Karma
Giving back to the community, the less fortunate, or the environment goes a long way to evoke that "warm fuzzy feeling." Here are some good ways to help those around you and save money on your taxes.
4 — Charitable Donations
Donations of clothing, household items, or money to qualifying organizations can help lower the amount of your taxable income. Generally, as long as you itemize, you can deduct cash contributions and the fair market value of most property you donate.
Watch out because not all charitable organizations qualify. Visit IRS.gov for a list of qualifying organizations. Also, only contributions made during the tax year are deductible. For example, if you pledged an amount to a charity in 2011, but didn't contribute the full amount in that year, you can only deduct the amount you actually donated.
Contributions of over $250 require a written acknowledgement from the organization. Furthermore, for the donation of items valued at more than $500, you must complete IRS Form 8283. For contributions of noncash property valued at more than $5,000, you generally must obtain an appraisal.
5 — Energy-Efficient Home Improvement Credits
If you made improvements to your home's energy efficiency in 2011, you can potentially claim a federal income tax credit for qualified improvements, such as new windows, doors, insulations, roofs, and central air-conditioners. The credit is up to $500. If you claimed this credit in previous years, it will be subtracted from the $500 limit.
Watch out if you put off these improvements until this year (2012). At this point, there are no available credits for 2012 onward.
6 — Credits for Energy Efficient Property
However, if you are thinking about taking a bigger step at your residence than new windows or insulation, and installing qualified alternative energy equipment, such as solar hot water heaters, geothermal pumps, or wind turbines, there are federal tax credits available to you for 2012. The credit actually runs through 2016 and is worth 30 percent of the cost of the qualified property.
Watch out if you have multiple properties. The credit only applies to your principal residence.
7 — Energy Efficient Vehicle Credits
Thinking of purchasing an electric vehicle? The IRS is offering the Plug-In Electric Drive Vehicle Credit which qualifies all electric drive vehicles purchased in or after 2010. This credit, which runs through 2014, is currently worth between $2,500 and $7,500 depending on the battery capacity of your electric vehicle.
Watch out; this credit is not for hybrid vehicles. Also, the American Recovery and Reinvestment Act (ARRA) begins phasing out the credit for individual manufacturers after they sell 200,000 of a vehicle model. Learn more about the credit values currently available at FuelEconomy.gov.
Protecting Your Nest Egg
There have been some messy trends in the economy in the last couple of years, and what better to motivate you to ensure a secure financial future? Here are a few tax tips to help you with your financial planning.
8 — Capital Gains Taxes
The stock market is doing some good things for us recently, and when you sell investments, you pay capital gains taxes. Long-term capital gains continue to be taxed at favorable rates through 2012, so now may be the time to make some moves in your portfolio. In 2012, middle- and higher-income investors are taxed at a maximum rate of 15 percent.
Watch out for Congress! It remains to be seen what Congress will do about the capital-gains increase in 2013 and, absent of any action, tax rates will go up.
9 — Qualified Retirement Plans
One quick strategy to reduce tax liability is to make a contribution to a traditional retirement account (IRA, 401(k), 403(b), SIMPLE IRA or SEP plan) and take advantage of the deductions.
The Retirement Savings Contributions Credit is designed to help low-to-moderate income workers save for retirement. You may qualify if your income is below a certain limit and you contribute to an IRA or workplace retirement plan, such as a 401(k) plan. The Saver's Credit is available in addition to any other tax savings that apply. For more information on Individual Retirement Arrangements visit IRS.gov.
Watch out for early withdrawal penalties! If you try to use the contributed money before the government considers you eligible, the tax penalty for an early withdrawal from your IRA is 10 percent, and you must also report your distribution to the IRS.
2012 and Beyond
Somehow, every year tax time manages to sneak up on us. While you're scrambling to pull together all of your records and documents for filing this year, why not make things easier on yourself going forward.
10 — Record Keeping
Here's a list of what documents to keep and for how long. If you are ever audited, you'll be grateful for this list!
Income Tax Returns and Related Items—Keep all federal and state income tax returns and supporting documents (i.e., those items confirming your income and/or deductions) for a minimum of three years after the return's filing date.
Mailing Receipts—Keep with your file copy of each tax return the U.S. Postal Service receipt—i.e., the registered mail receipt—showing the date the return was mailed. If your return is filed electronically, keep a copy of the electronic filing confirmation with a printed copy of the return.
Residential Property Records—Keep settlement records from all of your home purchases and sales in a safe place. In addition, keep records of the amounts that you spend for home improvements with this file.
Stock and Bond Records—Keep records of your investment (e.g., stock, mutual funds, and bonds) purchases.
Depreciation Records—For any rental real estate or depreciable business property that you own, keep records of the property's cost, the purchase date, the method used to calculate depreciation, and a schedule of all depreciation claimed on the property in previous years. Maintain these records until you sell or dispose of the property. Once you sell the property, keep these records with the tax return on which you report the sale.
Personal Records—Keep a permanent file of personal records—such as divorce agreements, copies of estate and gift tax returns under which you received property, etc.
Glass Jacobson is an accounting and wealth management firm with offices in Owings Mills and Rockville, Md. Glass Jacobson has redefined the accounting firm model by combining tax, accounting, and sophisticated wealth management services under one roof. This approach better coordinates all personal and business financial activities to optimize the financial success of clients.