Week of 3.27.09
Tax Tips and StrategiesThis year more than ever, the last thing you want to do is make a mistake on your taxes. Certified public accountant and radio talk show host Brian C. Greenberg offers 11 useful tax tips and strategies for first-time home buyers, business owners, and parents.
1. Don't try this at home: Tax returns should definitely not be a Do It Yourself (DIY) activity. Sure, anyone can type numbers into a tax return. But, not everyone knows how to apply correctly for earned income credits, education credits, and teacher deductions to name just a few. And there are no clear instructions for when to apply kiddie tax rates, or what the kiddie tax even is, for that matter! The average taxpayer would also not know when to claim head of household filing status and gain a more favorable tax bracket.
They also may not know what job related out of pocket expenses are deductible, when moving expenses are deductible, or when an IRA distribution is not subject to penalties. This is just the tip of the iceberg of our mammoth tax code, and not knowing the rules can result in thousands of tax dollars being overpaid to the government, and not staying in your pocket! So, unless you're a single person over the age of 24 who is renting with no dependents and not in school, please seek out a tax professional to prepare your tax return.
For those DIYs choosing to ignore tip #1, I will list some other tax tips to consider when preparing your tax return.
2. First-time homebuyers: If you bought a new home in 2008, and you have not previously owned a home in the last 3 years, you are entitled to receive a $7,500 refundable "credit" on your tax return. This "credit" is in fact a loan that needs to be repaid over 15 years, interest free, beginning in 2010.
However, if you were fortunate enough to have bought, or plan on buying in 2009, you get $8,000 no questions asked. This does not need to be paid back and you don't have to wait until April 2010 to get the credit! Just amend your 2008 tax return and claim it today.
Tax Strategy: If you are engaged to someone who does not qualify as a first-time home buyer, amend your 2008 return before you tie the knot.
3. Kiddie tax extended: If you are planning on having children to shift income to lower tax rates, you should be aware that the rules have changed. For children under 19, or under 24 and a full-time student, any unearned income over $1,800 will be taxed at the parent's tax rates. This is a change from 2007 where children under 18 with unearned income over $1,700 were taxed at their parent's tax rates. (Prior to 2007, the emancipation age was 14!)
Tax Strategy: If your child earns more than 50% of their upkeep, even while being a full time student, they could file on their own for the lower tax rates (not as a dependent on your tax return).
4. Education Credit: One can obtain a tax credit (a credit is when the IRS gives you a reduction of your tax liability dollar for dollar) on the money spent for their own, or their child's, college education. However, one must claim the child on their tax return in order to be eligible. This credit is subject to income limitations.
5. Claiming a child after divorce: Too often after a divorce occurs, the important detail of claiming a child is neglected. A typical arrangement is to can claim the children on the tax return every other year- should be documented in the divorce agreement. The loss of this deduction due to failure to fulfill financial obligations should also be included in the divorce agreement.
6. Develop a part-time business: With the economy in a funk, it never hurts to have more than one source of income. Look into eBay, buying antiques, or open a tax practice with all of these great tips! Having a business allows you to pick up some otherwise personal expenses for tax deductions like auto travel to purchase items for the business, or a portion of home expenses for operating the business out of a room in your house.
7. Charity: For those who used to donate an old car and price it as a new Lexus...those days are over. This type of deduction is now limited to how much the charity realizes from the sale of your car.
8. Employee expenses: Too often, deductions for money spent by employees in the performance of their job are missed on their income tax return. Set up a folder to track meals, auto expenses, cell phone bills, dues and publications, computer related expenses, seminars, and travel. Summarize this activity on a monthly basis. Any of these expenses, when not reimbursed by the company, can be deducted on your tax return.
Some tax tips for Business Owners
9. Employ your child: Tell your children to turn off Guitar Hero, and legitimately hire them, thereby shifting income from your tax bracket to your child's. If you're a sole proprietor, or have a partnership with your wife, you will also avoid paying payroll taxes. Use their income to invest in a Roth IRA. (Fund can be deducted from a Roth IRA for qualified education expenses without penalty.)
10. College tuition can be tax deductible: Code section 127 plans are qualified employer educational assistance plans that allow employers to offer up to $5,250 per year to employees in tax-free educational assistance. After you employ your child (see Tip #9) you could be eligible for this deduction, while avoiding paying payroll taxes. Two things to note, however, are that you must offer this incentive to all part-time employees and your child must be at least 21 years of age.
11. Domestic production activities deduction: If you're a traditional manufacturer, software development, architecture, engineering, or construction business you may be eligible for a tax deduction that could lower your effective tax rate by up to three percentage points. There are 247 pages of instructions in the IRS' "helpful" manual to explain the code. Suffice it to say that if you're business is in one of the categories listed above, you may be due additional deductions going back every year to tax year 2005. But, you have to hurry for tax year 2005! You only have until April 15, 2009 to amend 2005 tax returns.
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Note: The answers provided by Brian Greenberg represent solely his opinion and do not represent the opinion of NOW or its producers, who bear no responsibility for them. These answers do not necessarily reflect knowledge on Greenberg's part of all factors relevant either to the circumstances of the questioner, or to circumstances experienced by others in their own situations. You therefore should consult with, and solely rely on, your own professional advisors before making any material financial or legal decision rather than on the answers provided here.
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