TAX DEDUCTION POSSIBILITIES
FROM: Northwestern Life by Russell Stehling
|With tax season comes the inevitable desire to find as many tax deductions and credits as you can to reduce federal and state income tax liabilities. There are both well-known and often-overlooked opportunities to save each year. Read on to check out our list.Opportunities abound for tax credits and deductionsWhatever your income or stage in life, chances are you could benefit from some of the many tax credits and deductions available. Be on the lookout for these possibilities and consult your tax advisor to see which others would work for you and your family:
- Charitable donations—In addition to the large charitable gifts you make during the year, remember to calculate and deduct any out-of-pocket cash you may spend to support charitable causes. If you prepared and donated food, paid for stamps, or bought supplies for a mailing, the costs are deductible. Be sure to keep receipts and get acknowledgement for amounts over $250. Also remember to deduct 14 cents per mile for any use of your personal vehicle for charitable purposes.
- Child-related tax credits—In addition to claiming a child as a dependent, you may qualify for a tax credit for child and dependent care costs—remember to calculate these even if they are accumulated through a payroll deduction at work. There also are tax credits for qualifying adoption expenses and educational expenses (see below). Confirm with your tax advisor whether children need to file a tax return for wages or investment income earned.
- Education expenses—Various credits for college and career-focused education are available, depending upon your income. At the federal level, the American Opportunity Credit is worth up to $2,500 per student for the first four years of college, and the Lifetime Learning Credit is available for graduate-level and continuing education courses. If these are not options, you may be able to separately deduct up to $4,000 of college tuition expenses paid for you, your spouse or a dependent. Those with qualified student loans may benefit from the student loan interest deduction. Contributions to state education savings accounts (529 plans) may be deductible in some states for state tax purposes.
- Home ownership expenses—Many home-related deductions include the first-time homebuyer credit for people who signed a contract before May 1, 2010, and closed on a home by Sept. 30, 2010. Talk to your tax advisor to see if you meet the qualifications. Interest on mortgage and home-equity debt is deductible within certain limits, as are any loan prepayment penalties and state and local real estate taxes paid during the year. You also can claim a tax credit up to $1,500 for qualifying energy-saving home improvements in 2010.
- Investments—If you sold an investment at a loss in 2010, it may be deductible within certain limits—$3,000 in losses can be deducted in the first year on the federal return. Interest on EE savings bonds bought after age 24 can be excluded from your income if proceeds are used for college education for you, your spouse or dependent. If you sell mutual funds in which you have reinvested dividends, be sure to figure the reinvested dollars into your tax basis to lessen capital gains tax. The fund or your financial representative can provide information to calculate your basis.
- Job-related costs—Qualifying miscellaneous deductions, including employee business expenses, can provide a tax benefit when they exceed 2 percent of adjusted gross income, so it can’t hurt to track expenses that might qualify and add them up. These include unreimbursed expenses required to do your job, such as cell phone service, passport for business travel, profession-specific tools and clothing, legal fees and malpractice insurance premiums. Dues to professional organizations, subscriptions to trade magazines and convention costs for events held in North America also fall into this category. If you use your car on the job, you may be able to deduct either actual expenses or 50 cents per mile driven for business purposes in 2010.
- Job-hunting costs—Costs of looking for a job in the same line of work as your previous job count as miscellaneous expenses and can be deductible if the total exceeds 2 percent of adjusted gross income. These include transportation (mileage, cab fares, parking, tolls), lodging and 50 percent of food; employment agency fees, as well as advertising, printing and mailing costs. Expenses associated with looking for a first job are not deductible.
- Moving expenses—If you begin a new job that is more than 50 miles farther away from your home than your previous job, you can deduct expenses to move yourself, your family and your belongings to the new location. This includes 16.5 cents per mile to drive your own vehicle, plus parking fees and tolls. This deduction also applies for moving to a first job that is more than 50 miles from your home.
- Retirement—Contributions to individual retirement accounts (IRAs) may be deductible within limits. For example, individuals within income limits can receive a deduction for contributions of up to $5,000 to a traditional IRA, or up to $6,000 for those 50 or over. Individuals who are self-employed may be able to deduct up to $49,000 in contributions to a Simplified Employee Pension (SEP) IRA plan, depending on income. Individuals within certain income limits can also make non-deductible Roth IRA contributions up to $5,000 ($6,000 if 50 or over) to take advantage of potential tax-free growth. IRA contributions for 2010 must be made by April 18, 2011. Check with your tax advisor for details.
Remember that 2010 income tax returns are due on April 18 this year and filing has already begun. As you look at managing your finances and options for the coming year, your financial representative and tax advisor can help you include tax-favorable options in your financial security plan.
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