Let’s face it; the one thing most people dread is preparing and filing their taxes. Instead of calculating proper deductions, credits, incomes and a wide variety of other details, people would rather hand over their stuff to tax preparers or use tax software in hopes of maximizing their returns. However, it is important that you understand what exactly you’re claiming and what you are entitled to. With a little understanding of what’s out there, you can be better positioned to maximize your return and set out a income tax planning scheme that will help you in the upcoming year.
What are Tax Credits and how can I get them?
Tax credits is one of those phases that is often thrown out, but never fully understood. The idea behind tax credits is that they lower your taxes “dollar for dollar”, unlike tax deductions which only reduce your income. Tax credits are available in a wide variety of areas and should always be claimed if available so as to minimize your tax bill.
Some examples of available federal tax credits include: Child tax credit, education tax credit, first time-home buyer tax credits, new car deductions, retirement savings contribution tax credit, and adoption credits. Child tax credits are used when you have a child under the age of 17 that you care for, and is redeemable up to $1000, and possibly more due to changes enacted by the Economic Recovery Act. The education tax credit is designed to help alleviate the cost of attending a college or university by providing tax credits based on a sliding scale related to your income level. Two of the newer tax credits enacted are the first time home buyer tax credit and new car deduction. The home buyer credit is a $8,000 credit to first time homebuyers in 2009, subject to an adjusted gross income cap of $75,000 (individuals) or $150,000(joint filers) that lowers after. Finally, the new car deduction was added to encourage purchases of new vehicles, and allows individuals to deduct state sales or excise tax paid on the first $49,500 of the vehicle’s price.
Itemized vs. Standard Deductions, which is right for me?
Typically, people will elect to use the standard deduction amount given by the IRS because they do not want to go thru the hassle of finding receipts or having to calculate what they are permitted to deduct. By not doing a reasonable analysis of your status, you could be forgoing larger deductions than just the standard deduction.
Itemized deductions account for a wide variety of areas that include: charitable contributions, interest expenses, investment expenses, medical expenses, nonbusiness taxes, and professional fees. Many of these deduction areas, like medical expenses, require a certain amount (7.5% of your adjusted gross income in the case of medical expenses) be spent before you claim deductions. If you have large mortgage and student loan interest payments, it could be wise to do an Itemized Deduction.
If you believe your itemized deductions could exceed the standard deduction (currently set at $5,700 for single filers), it would be in your best interest to use itemized deductions and get every benefit possible.
When to Talk to a Tax Attorney
Income tax planning is a difficult area to navigate. The IRS issues various rulings throughout the year that interpret the tax laws, and often decide what can or can’t be deductible or expenses. By speaking with an experienced tax attorney, you can ensure that areas in your income tax planning have not be subject to changes in law interpretation. If you find yourself subject to an audit, a tax attorney can inform you of your rights and what you should do to best prepare yourself.
