The U.S. tax code has its own language, it seems. How literate are you when it comes to doing taxes, let alone understanding them?
“Most people don’t understand taxes, and those that think they do generally only get it partially right,” says Nick Stovall, chief financial officer of the Minneapolis-based financial services firm, Gradient Financial Group LLC.
Sympathetically, he explains that with over 5,000 pages in the federal tax code and tens of thousands of pages in regulations – not to mention constant changes – it is tough to digest and comprehend all of the information, and thus “it is safe to say that indifference is a natural state of being.”
Luckily, you have a few extra days to get a handle on your tax return this year due to Washington, D.C.’s April 15th observance of Emancipation Day. The tax filing deadline gets pushed back to the next business day, Monday, April 18.
Whenever you decide to buckle down and get your taxes done, here are some tips and useful information to help you prepare, starting with some important tax credits, which are dollar-for-dollar reductions in your taxable income.
1. The saver’s credit – One common piece of advice from several financial experts was funding a retirement plan, such as the 401(k) or an IRA. The Internal Revenue Service gives a non-refundable tax credit to those making salary-deferral contributions to a plan sponsored by their employers, giving an added incentive to save for retirement.
“That can be up to $1,000 dollars, double if you’re married,” says Melissa Labant, technical manager and tax staff of the American Institute of CPAs. “That’s a significant opportunity for young people,” even if they do not contribute much to their plan.
Mitchell Franklin, assistant professor in the Martin J. Whitman School of Management at Syracuse University, explains that “though 2010 is over, contributions may still be made” until the April 18 deadline and still be counted as 2010 deductions.
2. Alternative Motor Vehicle Credit – This is a set of four non-refundable credits for certain types of new energy-efficient vehicles purchased before December 31, 2010. These vehicles are specific, and the potential credit amounts vary by type of vehicle.
Here are the categories and an example of a qualified car and credit amount: qualified hybrid vehicles (2010 BMW ActiveHybrid X6, $1,550); qualified fuel cell vehicles (2009 Honda Civic GX, $4,000); qualified alternative fuel motor vehicles and heavy hybrids (2009 Ford Focus converted to operate on compressed natural gas, $4,000); and advanced lean-burn technology vehicles (2011 Audi A3 2.0L TDI, up to $1,300).
3. Education – “There are so many tax incentives related to education,” Labant of the AICPA says. The American Opportunity Credit, an expansion of the Hope Credit, can be worth as much as $2,500 for higher education costs, an increase of $700 from the original program. Formerly this credit applied only to the first two years of post-secondary education, and now the new credit targets the first four years. Additionally, the income limits have been raised from $58,000 in 2008 to $90,000 now.
4. Making Work Pay Credit – “It’s been around for only two years, and a lot of people aren’t aware of it,” Labant of the AICPA says. Taxpayers must file a Schedule M, and it is worth up to $400 for individuals whose income was $6,451 or more but less than $95,000, and double for married couples filing jointly whose income was $12,903 or more but less than $190,000. This is an employer-related credit, meaning that it allows taxpayers to reap refunds if their employers had not already decreased their withholding.
Next we’ll consider deductions, which is a way to reduce your taxable income. If you itemize deductions, rather than take the standard deduction, here are some commonly overlooked items:
1. State taxes paid – Stovall of Gradient explains that this is an item that is missed quite often. If you paid state income tax when you last filed your return or in any prior year, “then these payments are deductible along with the state taxes paid during the year for your current state tax liability.
2. Non-cash charitable contributions – When we write off charitable contributions, cash donations are the first to come to mind. But don’t forget those donations that are not cash. If you drop off a bag of clothes or books at a Goodwill store, the value of those items can be evaluated and counted, too. It may seem time-consuming and tedious, but it is something worth taking a look at.
“What most of us tend to ignore for these types of contributions are things such as miles driven to the Goodwill to drop these things off, or miles driven to any charity for that matter,” Stovall says. Each mile can be deductible at 14 cents.
Miguel G. Farra, CPA and JD at the public accounting firm, Morrison, Brown, Argiz & Farra LLC, also points out that you need to “be sure charities are in good standing with the IRS before giving” by checking the IRS website to view the list of charities “in danger of losing their exemption.”
3. Job-hunting costs – Job search expenses can be tallied under “miscellaneous deductions,” as long as you meet the following conditions: You’re looking for a job in a field you are already in; there is no substantial gap between when you quit your last job and when you began searching; and this is not a search for your first job. Keeping itemized records of your costs is essential in this process.
4. Owed money – If you were owed money but have given up on receiving it, you can get a deduction on that when you determine the debt is basically worthless. It can be categorized as non-business bad debt, and it will be treated as a short-term capital loss. If you take this deduction, you will need to file a Schedule D.
Perhaps the most important piece of advice, which comes from Stovall of Gradient, is to keep your cool.
Last-minute filers “become stressed with time constraints and tend to take less time to review their options,” Stovall says. His advice: finding a reputable and user-friendly service or software that will prompt you with questions and alerts so that you won’t miss anything; “the more questions, the better.”