As with the January tips, you'll find a tidbit each day -- yes, weekends and holidays, too! -- on ways to make your 2010 tax return filing easier and less costly, along with tax planning ideas to reduce your already accumulating 2011 tax bill.
The timely advice will continue through April 18, this year's extended filing deadline day.
Many of January's tips, as well as those here for February and on the upcoming March and April pages, appear courtesy Bankrate's annual tax guide. But some will be original Don't Mess With Taxes advice.
So now that you're through perusing last months tax tidbits, let's get started on the Daily Tax Tips for February 2011.
- Adjust your withholding -- When you finished your return, did you discover that you owed the IRS much more than you expected? Or did your filing go the other direction, with you getting a big refund? Neither situation is good when it comes to taxes. Yes, it's always nicer to get money back, but that means that you've let Uncle Sam have use of your money all year. Wouldn't you have rather had that extra cash yourself months ago? And if you owe a lot when your file, you could get slapped with an underpayment penalty. Ideally, you want your withholding to be as close as possible to your eventual tax bill. You can make that happen by adjusting your withholding. It's easy to do; just run the number (the IRS has an online calculator that can help) and submit a new W-4 with your payroll administrator. (Feb. 1, 2011)
- Some income isn't taxed -- Really! I know that's hard to believe, especially when you're working on your tax return and it looks like the IRS is angling to get a piece of every one of your dollars. Heck, the 1040 even has that line for "other" income, right? But some things do escape the tax collector. Child support is tax-free. So is interest on certain state and municipal investment instruments. And some income that you probably wish you didn't need, such as disability payments and damages for emotional distress, also aren't taxed. Make sure you know what is and isn't taxable to ensure that you don't overpay the IRS. (Feb. 2, 2011)
- Deduct your mortgage points -- Even with today's very low mortgage interest rates some buyers find it worthwhile to pay points to get an even better deal. Each point is 1 percent of the loan amount. How much in points you paid will be on your closing statement, so be sure to have that document handy when you file your 1040. (It has other tax-deductible items, too, such as property tax payments.) If you paid the points for a loan to acquire your home, they are deductible in full in the year they were paid. Points also can produce tax savings when you refinance, although not all at once. In this case, the you spread the points deduction throughout the life of your home loan. (Feb. 3, 2011)
- Donating a vehicle -- Are you ready to get a new auto? Rather than trade in your old car, consider donating it to a charity. Many groups accept vehicles; some even come pick them up. And you might get more in a tax deduction than a dealer will give you as trade for a newer set of wheels. To get the tax deduction, though, you have to make sure you follow the IRS auto donation rules. The big one is get a receipt from the qualified charity to which you gave your car (or truck or motorcycle or even your boat). Then make sure you know what the the group did with the vehicle and/or how they valued your gift. That will determine how much you can write off on Schedule A when you itemize your deductions. (Feb. 4, 2011)
- Home sweet homeowner tax breaks -- Buying a home is a major step. But it also could provide you with many valuable tax deductions. The most widely-known tax break is the mortgage interest deduction. Did you pay points to get a better loan rate? Those are deductible, too. Then there's the write-off of your local real estate taxes. This tax deduction makes that annual levy almost tolerable. The ultimate home-related tax break comes when you sell your residence. Sale profit of up to $250,000 if you're single, $500,000 if you're married and file a joint return, is tax free. (Feb. 5, 2011)
- Standard property tax deduction add-on is gone -- One of the best homeowner tax breaks is the ability to deduction your annual real estate taxes. For a few years, that tax-saving option was extended to a degree to homeowners who claimed the standard deduction; they were able to include some of their property tax payments (up to $500 for single filers, up to $1,000 for married joint filers) to their standard deduction amount. No longer. The increased standard deduction for real estate taxes expired at the end of 2009 and was not extended for the 2010 tax year or beyond. (Feb. 6, 2011)
- Gambling, other winnings, are taxable income -- Did your big Super Bowl bet on the Green Bay Packers pay off? Congratulations! You've also made the IRS very happy, since gambling winnings are taxable income. The good tax news is that if you weren't as lucky with some other bets, placed either on the NFL championship game or other games of chance during the rest of the tax year, then you can use those gambling losses to offset your winnings and reduce, or possibly zero out, your taxable winnings amount. (Feb. 7, 2011)
- Let Uncle Sam help pay for your move -- If you relocate for a job, you can write off some of your moving costs when your file your tax return as long as you meet two tests. The first is distance. The location of your new job must be at least 50 miles farther from your previous residence than your last office was. This is to keep folks trying to deduct the cost of a move that was made simply to make commuting easier. The second test is time. You have to work full time at your new, move-related job for at least 39 weeks during the first 12 months after relocating. Self-employed movers get two years to meet a 78 week work requirement. Once you meet the time and distance tests, then most of your big moving costs can be claimed. And you don't have to itemize to get this tax break. Just fill out Form 3903 and then put the amount from that document on the "moving expenses" line (#26) of your Form 1040 tax return. (Feb. 8, 2011)
- Deducting unreimbursed business expenses -- Some folks give extra to their job, not just in time or personal dedication, but in cash. They buy a few office supplies or pay for a professional seminar out of their own pockets. If these employees are not reimbursed for their job-related expenditures, they might be able to deduct them on their tax returns. There is a wide variety of expenses that can count as long as they were, in the IRS' estimation, "ordinary and necessary" and were required for you to carry out the job for which you were hired. The big downside when it comes to claiming these out-of-pocket business costs is that you must itemize and your expenditures are considered miscellaneous expenses on Schedule A. That means your office costs that aren't paid back and other items counted in this deduction category must exceed 2 percent of your adjusted gross income before you can write them off. (Feb. 9, 2011)
- The first-time homebuyer tax credit: Paying it back or claiming it -- The first-time homebuyer tax credit, created in 2008 and expanded several times over the years, has made it possible for many people to buy a home. But for some of the credit claimants, it's now payback time. The original homebuyer credit was really a $7,500 interest-free loan that must be repaid in 15 equal installments, starting with the 2010 tax filing. Other homeowners this filing season might be claiming the subsequent $8,000 and $6,500 versions of the homebuyer credit. And still others could face repaying the full credit in one lump sum with their tax filing if they didn't live in the home long enough. (Feb. 10, 2011)
- Claim your Making Work Pay tax credit -- Workers got up to $400 last year, or up to twice that amount if they were married and filed a joint tax return, thanks to the Making Work Pay tax credit. The money showed up in paychecks via revised payroll withholding tax tables implemented at your workplace. But even though you already got -- and spent! -- the cash, you still need to file Schedule M this filing season to make sure the IRS accounts for your Making Work Pay credit. Yes, it's seems like a silly and redundant requirement, but we're talking taxes here. If you don't file the Schedule M and officially claim your Making Work Pay credit, you'll essentially give the money back to Uncle Sam. (Feb. 11, 2011)
- Special rules for military taxpayers -- U.S. military personnel, whether on active duty or in the reserve, are not exempt from taxes. Members of the armed forces must pay any federal taxes owed by the April filing deadline, even when stationed abroad. But there are some special rules that apply to military taxpayers, especially those serving in hazardous areas. And some legislation enhances a variety of tax breaks for service personnel and their families. (Feb. 12, 2011)
- Check out your tax preparer -- You've decided to turn your taxes over to a professional. You've determined which type of tax preparer is best for your personal financial and tax circumstances. Now you have to make sure the preparer you hire is truly professional, ethical and knowledgeable. It's not hard to hire the best tax pro, it just takes some extra checking. But it's time well spent, especially since it involves something as important as your tax obligations. (Feb. 13, 2011)
- Tax filing choices for couples -- Most married couples file their tax returns jointly, combining incomes and sharing deductions. In most cases, this works out better for them. The marriage penalty has been eased and many tax breaks are only available to husbands and wives if they file jointly. But sometimes, it pays for a couple to reevaluate their filing status. Married couples also have the option to file separately and sometimes sending in two tax returns instead of one is warranted. This could be the case is one spouse has questions about some tax strategies the other is using. It's also a good option in less suspicious circumstances, such as when a husband or wife can get more out of some deductions, such as medical expenses, by filing a separate return. Run the numbers both ways and see which works for you and your better half at tax time. (Feb. 14, 2011)
- Alimony's tax consequences for both exes -- The end of matrimony has led to the start of alimony. Do you know your tax responsibilities regarding this post-marital payment? If you are making alimony payments to an ex, you can deduct them as an adjustment to your income directly on your Form 1040. This will help reduce your gross income, getting you a smaller adjusted gross income, and hopefully to a somewhat smaller tax bill. If you're on the other side of alimony, getting the payments, then that's taxable income to you. If you don't report it and your ex does tell the IRS about making the payments, then you'll most certainly hear from the IRS about your oversight. (Feb. 15, 2011)
- Deducting job search expenses -- It's a challenging time for folks looking for work. But you might be able to get some help from the IRS. No, I'm not talking about applying for one of the agency's seasonal jobs processing returns, although that might not be a bad idea. The tax code allows job hunters to, under certain circumstances, deduct work search costs on their taxes. There are two key factors here. First, you must be looking for work in the same field in which you are or were most recently employed. And to count these expenses, you must itemize and have enough overall miscellaneous costs to exceed 2 percent of your adjusted gross income. (Feb. 16, 2011)
- Deducting disaster losses -- Even when you prepare for the worst, dealing with a disaster's aftermath is never easy. But you might be able to get some help from an unexpected source, the IRS. In most instances, you can claim your unforeseen casualty losses as itemized deductions. When you're the victim of a presidentially declared disaster, you get additional choices on when to file the tax claim. This option could get you much-needed money for repairs sooner. (Feb. 17, 2011)
- Tracking your tax refund -- Tired of waiting for your tax refund to show up? You have several ways to find out its status. You can check on just where in the IRS processing system your refund is by phone, online and smartphone app. If you e-file, the IRS also provides a guide as to when you can expect your refund. (Feb. 18, 2011)
- Report your tips -- If you receive gratuities as part of your job, remember that this extra money for a job well done is taxable income. In fact, you should be regularly reporting your tips to your employer. When you make at least $20 in tips for a month, tax law requires you to let your boss know that amount on the 10th of the next month. Your employer uses your tip amount reports to figure how much Social Security, Medicare and income taxes to withhold on both your wage and tip income. And remember, this rule doesn't just apply to restaurant servers. Any worker who receives tips must report them and pay taxes on them. (Feb. 19, 2011)
- Don't be a bad tax client -- Hiring a tax pro is a two-way street. While you must carefully select and check out your tax preparer to make sure he or she fits your filing needs, your tax professional depends on your help to file an accurate return and get your the most legitimate tax breaks. So don't be the tax client from hell. A tax pro can only work tax magic as long as he or she has a client who's a willing assistant. Answer your tax pro's questions, provide the information he or she seeks and be as available to your tax professional as you expect your preparer to be to you. (Feb. 20, 2011)
- Don't overlook these tax deductions, credits -- Tax filing is a giant scavenger hunt for ways to reduce what we owe the IRS. But every year, too many taxpayers overlook some tax deductions and tax credits that could help reduce what they owe Uncle Sam. Some tax breaks are available only to a select few. Others are available to a wider taxpayers pool. And a few require some extra filing effort. But it's always worth the time and figuring on a few more forms cut your tax bill. So take the time to check out every possible tax deduction or credit and claim all that you can. (Feb. 21, 2011)
- Some local taxes can lower your federal tax bill -- To paraphrase a beloved Christmas pronouncement, "Yes, American taxpayers, there are some good taxes." The good ones are those that you can deduct when you file your annual federal return with the IRS. These include state and local income and sales taxes and property taxes. The one downside here is that you must itemize to claim these state tax deductions. Previous options to deduct some of these taxes by adding a portion onto your standard deduction amount ended on Dec. 31, 2009, and were not extended into 2010 or beyond. Still, the extra work could be worthwhile, so if you pay these taxes, take a look at whether you can deduct them on Schedule A. (Feb. 22, 2011)
- Tax deductions without itemizing -- Deductions are a good way to lower your tax bill. Filers get the choice of itemizing or claiming the standard deduction. But there also are more than a dozen so-called above-the-line deductions available on the Form 1040 that anyone, regardless of deduction choice, also can claim if they're eligible. They include traditional IRA contributions, educator expenses, student loan interest and alimony payments to name a few. Some are even available on the 1040A. So check them out. It's an easy way to reduce your income, which will help reduce your tax bill. (Feb. 23, 2011)
- Tuition and fees deduction helps cover college costs -- If you or your child is attending college, some tax homework could help you pay some of those expenses. This tax break, one of the above-the-line deductions found on both the Form 1040 and Form 1040A, is worth up to $4,000. Note that this adjustment to income covers just what its name says; no room, board or book costs are eligible. Also be careful when you use other college-related tax breaks, such as money from a state tuition plan, a Coverdell educational savings account or interest on savings bonds. These could reduce or eliminate the available tuition and fees amount. But if you can use this deduction, it can be a great -- and easy -- way to pay some big higher education costs and reduce your tax bill. (Feb. 24, 2011)
- Educators get $250 deduction for out-of-pocket expenses -- Lots of school districts have cut back during this recent economic slump. To make up the difference, dedicated teachers often spend their own money to make sure their students get the optimal learning experience. If you're such an educator, be sure to claim your out-of-pocket purchase of classroom supplies. This above-the-line deduction appears on both Form 1040 and Form 1040A. There you can count up to $250 as an income adjustment to help reduce your gross income. If both a husband and wife are teachers, the joint filers can claim up to $500 as long as you each spent at least $250 on allowable school materials. (Feb. 25, 2011)
- Deducting workplace attire -- Unless you work from home, you spend part of your income on appropriate clothes to wear at the office. That's a personal expanse and is not deductible on your taxes. But if your job requires you wear a specific uniform, then you might be able to write off not only the cost of the apparel, but also what you pay to keep it clean. In order to claim these costs as miscellaneous itemized deductions for unreimbursed employee expenses on Schedule A, this workplace-required clothing must be an ordinary and necessary expense. So don't try writing off that new shirt or shoes that you'll don for your next big date. But if you're a cop or firefighter, you might have an added tax deduction to claim. (Feb. 26, 2011)
- Don't forget about your state taxes -- I realize that if you live in one of the 43 states (or D.C.) that collects some sort of income tax, you're well aware of your tax obligations to those jurisdictions, especially if you're in one of the 10 states with the highest tax rates. But sometimes we all lose track of time. So this is just a friendly reminder to not put off work on your state and local tax filings too long. Most of the states that collect income taxes have the same April due date as your federal forms. And as with your federal return, when you get in a hurry, you're more apt to make mistakes. So if you haven't at least started thinking about your state taxes yet, make some time soon to do so. The ol' blog's state tax directory has links to all the state tax departments where you'll find forma, filing information and, in many cases, the option to file your state return online at no cost. (Feb. 27, 2011)
- Maximize your medical deductions -- Health care costs are high, but you might get some help from the IRS in making the payments. You can deduct medical costs if your total health care expenses exceed 7.5 percent of your adjusted gross income. There is a wide variety of IRS-approved medical expenses to help you get over this deduction hurdle, including the costs of drug rehab programs. So hang onto all your medical receipts and tally them before you file. In addition to helping you feel better physically, the costs could make your tax bottom line healthier, too. (Feb. 28, 2011)
Missed a tip or two?
Again, thanks for continuing on our filing season long tax tip journey. Once we wrap up February, new pages for March and April Daily Tax Tips will be added.