By: Bryan S. Kerr, BSc, MA
MIAMI – The following tax tips will help you gain an advantage with your 2010 return
1. Use up your flexible-spending account. In 2010 your employer deducted money from your paycheck to cover your child-care and medical expenses. Remember to get that money back. Gather your receipts from doctors, clinics, hospitals and pharmacies for services provided to you and your dependents during 2010. If You discovered you didn’t spend enough in 2010 to get back all your money? Call your plan manager to find out if medical services received and paid for through March 31 of 2011 qualify. The law changed several years ago to allow catch-up time so employees don’t lose their money.
2. Adopt a child. Although this is a major decision and not one to be made simply because of a tax break, if you are planning to add to your family via adoption, then Uncle Sam offers a nice benefit this year. As part of the health care reform act, the adoption tax credit was expanded. This credit helps adoptive parents pay some of the processing costs. For 2011, that amount is a maximum of $13,360 per eligible child. The increased credit applies to the adoption of any child, not just special needs children, and includes international and domestic adoptions. Even better, the adoption credit is now refundable, meaning the claim could produce a refund if you owe no tax. However, the adoption tax-break enhancements are only good though 2011 unless Congress extends them.
3. Convert to a Roth IRA. Roth IRAs are popular because when the money is withdrawn in retirement, there’s no tax due. These accounts are enjoying a new surge of popularity now that there’s no longer an income limit on who can convert a traditional IRA to a Roth account. This conversion option became available last year and also included the ability to spread any taxes due upon conversion over two subsequent tax years. The tax-deferral opportunity is gone. If you convert a traditional IRA to a Roth IRA in 2011, you’ll have to pay all conversion taxes this tax year. But for some, it still might be worthwhile to convert to a Roth.
4. Insurance as for your vehicle can be deducted on your federal tax return: Motor vehicles used for business purposes are deductable using actual expenses instead of mileage. Deductions such as depreciation, gas, oil, tires, licenses, repairs and the related, the insurance premiums may also be deductible. Remember, if the actual expenses deduction is chosen instead of the mileage deduction, mileage deduction cannot be deducted in later returns.
5. Health and long-term care insurance premiums are deductable on your federal tax return: A self-employed person can deduct 100% of health and long-term medical costs for themselves, their spouse, and their dependants. This deduction is taken as an adjustment to income and it can only be taken if the self-employed person or spouse is not covered by an employer health insurance plan.
6. Medical expenses are also deductable on your federal tax return: Depending on income, medical expenses are deductable. Remember to take into account invoices for dental work; visual care, including glasses and contact lenses; even certain therapy, smoking cessation and weight-loss programs may count. You can get printouts from your pharmacy, physicians and therapists, if you don’t have the invoices. You may not deduct any expenses for which you receive insurance reimbursements. Certain other expenses including health insurance and dental insurance premiums along with some amounts paid for long-term care insurance contracts may be deductible. These deductions are limited to costs over 7.5% of one’s income. Because medical expenses are limited to costs over 7.5% of income, don’t forget to schedule and pay for procedures before December 31. of the tax year.
7. Various miscellaneous insurance expenses can be deducted on your federal tax return: Various miscellaneous expenses may be deductable on your federal tax return for some individuals but is subject to 2% of the individual adjusted gross income. Insurance related miscellaneous expenses may include unreimbursed employee malpractice insurance and liability insurance premiums, appraisal fees for casualty losses not reimbursed by insurance, safe deposit box rentals to store investment papers such as insurance annuities. The remaining unrecovered investment in an insurance annuity may be deducted from a retiree’s tax return if they are deceased before the entire investment is recovered.
8. Job-related moving and storage expenses are deductable: Some persons may be able to deduct certain moving expenses including the cost of storing and insuring household goods and personal items. The deduction is only eligible during any 30 consecutive days after the items are moved from the previous home and before they are delivered to the new home.
9. Tax returns can be amended. Remember Federal tax returns can be amended for up to three years. If, after reviewing deductions on previous federal tax returns you find item omitted, you may be able to amend the return to include that deduction and receive any refund applicable. Additional copies of previous year’s tax returns can be secured from the IRS.
10. Start a business. Tax laws offer numerous ways for business owner to save. The Small Business Jobs and Credit Act of 2010 increased the Section 179 tax deduction. This provision allows you to deduct qualifying expenditures in the tax year in which they are made rather than depreciate it over several tax years. For 2011, the maximum Section 179 deduction is $500,000. Other popular business tax breaks also remain in effect. You can write off some of your new business startup costs, as well as many home office expenses if you run your operation from your residence. If your company is bigger and in the manufacturing sector, the domestic production activities deduction could help. It allows you to claim a percentage of your taxable income to help reduce your company’s tax bill. The main requirement is that the manufacturing be based in the United States, but the range of qualifying activities is wide. Details can be found in the instructions for IRS Form 8903, which you’ll file to claim the deduction.
11. Evaluate educational accounts. The cost of college increases every year, but tax-advantaged savings account plans can assist with the reduction of that cost burden. The key is determining which plan best suits your needs. Every state offers at least one 529 plan, a savings account set up for a child to help pay for future college costs. Your contributions to a 529 plan are not tax deductible, but the earnings are not taxed. When you take out funds to pay for eligible expenses, the distribution also is tax-free. The American Recovery and Reinvestment Act of 2009 added computer equipment and services to the list of allowable 529 expenses. But that option expired at the end of 2010. Tax-free money from another educational savings plan, the Coverdell Education Savings Account, still can be used in 2011 for computer costs. However, Coverdell accounts, which were expanded as part of the Bush tax cuts, lost some other valuable options this year. If Congress doesn’t renew the expired Coverdell provisions, such as the ability to contribute up to $2,000 a year and use the tax-free money for precollege school expenses, you might want to consider rolling Coverdell money into a 529 Plan.
12. Unemployment insurance benefits must be reported: It is important to remember that unemployment insurance compensation is considered taxable income and must be reported. Report also, any state or federal unemployment insurance benefits received during the tax year of filing.
13. Certain casualty and theft losses reimbursement is reportable: Damages from losses due to perils on your home such as floods and tornadoes, and losses due to damage to automobile may be deductible if one itemizes deductions. The losses need to be reduced first by any insurance amount received and then reduced by 10% of one’s adjusted gross income.
14. Estimate your AMT exposure. Each year the US Congress makes changes to the income levels for the alternative minimum tax, or AMT, many middle-income taxpayers still find each year that they are subject to this parallel and costly tax. This extra tax calculation, in which many commonly claimed deductions are not allowed, is required if you earn more than a certain threshold income. It was created in 1969 to ensure that wealthier taxpayers pay at least a minimum amount of tax. The main problem with the AMT is that it’s not indexed to inflation, hence the need for yearly legislative action to increase the amount of income exempt from the AMT. But just as problematic is that many deductions allowed under the ordinary tax system, such as state and local income taxes, real property taxes, miscellaneous deductions and the usual amount of medical expenses, cannot be used to offset the AMT. If you’re in a higher tax bracket and fear that you might end up paying the alternative tax, talk with your tax adviser sooner rather than later to consider ways to limit your AMT exposure.
15. File a new W-4. There are a number of reasons you want to do this in January. When Congress finalized the tax-extender bill last month, there was a bonus for you. Instead of the confusing Making Work Pay Credit we’ve had for the last two years, we get a reduction in Social Security taxes. You won’t have to adjust your tax return for this, unless you had several jobs with wages over $106,800. You will be getting an extra 2% in your paycheck, due to the reduction of Social Security taxes. For someone earning $60,000, that means an extra $100 per month (if the full $60,000 is subject to Social Security taxes).
Kerr & Kerr offers tax consultation and advice for individuals and all corporate returns – from the simplest corporation to controlled groups, SCorp, Partnerships, Estate and trusts, and tax exempt organizations. Bryan S. Kerr, BSc, MA of Kerr & Kerr LLC can be reached at office (305) 387-5880 or cell (305) 904-4720 and via email [email protected] visit them at kerrkerr.com
