But the advice doesn't stop there. There's also tax planning ideas to reduce your already accumulating 2011 tax bill.
The tax tips will continue through April 18, this year's extended filing deadline day.
Many of the tips in these monthly compilations are courtesy Bankrate's annual tax guide. But some tips will be Don't Mess With Taxes originals.
So now that you're through perusing the last couple of months' tax tidbits, let's get started on Daily Tax Tips for March 2011.
- Turn your hobby into a tax-saving business --If you're earning regular money on your recreational pursuit, you might save some tax money by turning it into a job. When your hobby produces income, you owe tax on it. You can reduce the taxable income amount by deducting your hobby expenses, but only up to the amount of money you make on the hobby. And that must be deducted as part of miscellaneous expenses on Schedule A with its 2 percent of adjusted gross income threshold. But when your hobby is turned into a business, you can deduct your associated expenses on Schedule C or C-EZ without worrying about a percentage limitation. This expanded business deduction ability will help you reduce the taxable income from your new hobby-turned-work. And if you have an occasional year where you lose money, you can use that loss to reduce other income you might have. (March 1, 2011)
- EITC can help workers who don't make much -- The Earned Income Tax Credit, or EITC (or sometimes EIC), can be a great benefit for workers with low-paying jobs. In this recent economic downturn, folks who have seen their income drop because of lost jobs or because they took lower paying work should check out whether they qualify for the EITC. If you can claim this credit, depending on your filing status it could provide you with 2010 tax savings ranging from $457 to $5,666. The IRS has an online EITC Assistant to help you determine whether you qualify and what your tax benefit will be. (March 2, 2011)
- Older, visually-impaired filers get larger standard deduction amounts -- It's no fun getting older. Trust me. I know. But there is a bit of a tax advantage. Once you celebrate your 65th birthday, you get a bigger standard tax deduction amount. Even better, all you have to do is check a box on your Form 1040 or 1040A. A larger standard deduction amount also is available for taxpayers of any age who are legally blind. The same checkbox filing method applies to these taxpayers, too. The bottom line, an older married couple filing jointly and where both have vision issues could claim a standard deduction amount that's $4,400 more than than their younger taxpaying counterparts. Details are found in worksheets in the 1040 and 1040A instruction books. (March 3, 2011)
- A look at all the capital gains tax rates -- If you're a patient investor, the tax code provides you with a break. Capital gains taxes on the sale of long-term investments -- those assets held for more than a year before you dispose of them -- have always been more favorable than ordinary income tax rates. And since 2003, capital gains rates have been at historic lows. The most common rate is 15 percent for taxpayers in the higher income tax brackets. It's 0 percent -- that's right, zilch, nada, nothing -- for investors in the 10 percent and 15 percent brackets. And there are even more capital gains rates for specific investments. Check them out. It's worth the extra effort to pay lower taxes. (March 4, 2011)
- Tax savings for small businesses -- For many small businesses, Uncle Sam makes a fine business partner. The tax code is full of tax breaks for companies, and especially smaller firms, thanks in large part to the Small Business Jobs Act of 2010. There are opportunities to write off more costs in a single tax year as Section 179 expenses, use your cell phone with the IRS' OK and save on some of your company's medical costs. So if you run your own business, be sure to check out the ways the tax code can help you save. (March 5, 2011)
- Donating goods to charity -- Giving household items, used clothing and other personal property to a charitable organization can provide a nice tax deduction as long as you follow IRS rules. First, the property must be in good or better shape. Then be sure to value your donation properly. And as with any contribution, make sure you get a receipt, just in case the tax man wants to see proof of your donation. (March 6, 2011)
- Adoption tax credit helps growing families -- Uncle Sam can be a really good relative when it comes to paying adoptions costs. The adoption tax credit provides substantial financial help to parents who use this method to add to their families. For 2010 taxes, the credit is worth $13,170. There's also an income exclusion in the same amount where companies provide adoption assistance to workers. And best of all, the adoption tax credit is now refundable, meaning it could help you get tax money back even if you don't have an IRS bill. (March 7, 2011)
- Deduct your student loan interest -- Very few of us can pay for college on our own. If you borrowed money to cover your higher education costs, don't forget to deduct the interest you paid on that student loan. Up to $2,500 in interest is deductible. Of course, if you paid less than that, then you can only write off the actual student loan interest you paid. You'll find the exact amount on the Form 1098-E or similar document that your lender should have sent you earlier this year. One of the best things about the student loan interest deduction is that you don't have to itemize to claim it. It's an above-the-line deduction found directly on both Form 1040 and Form 1040A. There are some qualification requirements, though, such as income limits and what school expenses you paid with the loan money. But most students qualify, so check out the student loan interest deduction. It could help make your education pay off at tax time, too. (March 8, 2011)
- Computing correct investment basis -- No one wants to pay the same tax twice. But you could end up doing just that if you don't correctly figure the cost basis of the stocks or mutual funds you sold. Proper basis where you reinvest dividends and capital gains distributions rather than taking the earnings in cash. These transactions increase the basis, or tax value, of your investment. Making sure you track and account for these earnings will make a big difference in both any capital gains taxes you'll owe, as well as any tax losses you can claim to offset or reduce a potential tax bill. (March 9, 2011)
- Deducting private mortgage insurance -- If you don't make a down payment of at least 20 percent when you buy your home, your lender will require private mortgage insurance, or PMI. A PMI policy is coverage that you, the home buyer, pay for, but it protects your lender if you default on your loan. In most cases, this is just a cost of homeownership that you have to bear. But some homeowners might be able to deduct their private mortgage insurance premiums. If you and your loan meet the IRS requirements, you can deduct the PMI premiums in the "Interest You Paid" section of Schedule A. (March 10, 2011)
- Tax help in caring for your kids -- No, an IRS agent won't come and babysit for you, but it offers the next best thing: a tax credit. The child and dependent care credit is a tax break for expenses incurred to look after your youngsters while you (and your spouse if you're married) work. No, it doesn't cover all your child care costs; only up to $3,000 if you have daycare (or day camp) expenses for one child; $6,000 for two or more kids' care costs. And no, you only get a percentage of those costs back as a credit. And if you earn a lot of money ($43,000 is a lot in this case), you won't get the full tax break. But it is a credit. So if you qualify, it will reduce your tax bill dollar-for-dollar. (March 11, 2011)
- Corporate taxes are due March 15 -- March 15, the Ides of March, also is the day that corporation tax returns are due. All domestic corporations, unless exempt under section 501 of the tax code, that have been in existence for any part of a tax year must file an income tax return regardless of whether they have taxable income. Generally, Form 1120 is the form to file, which can be done electronically. As with individual taxes, corporations can request an extension to file a tax return. On the business side, it's Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information and Other Returns. As with individual returns, the extension is for six more months to file. You can use the time to make sure you don't overlook any business tax breaks. And just like with individual taxes, a corporate filing extension does not extend the time for paying any due tax. Interest, and possibly penalties, will be charged on any part of the final tax due not shown as a balance due on Form 7004. (March 12, 2011)
- FSA final deadline is March 15 -- If you have a medical flexibile savings account (FSA) at work and if you didn't spend all your 2010 FSA money at the end of last year and if your employer offers you a grace period, you still can use that account money. Whew! That's a lot of "ifs." But if (yes, another if!) they all apply to you, you won't lose your 2010 FSA funds if (yes, one more!) you spend it on eligible medical items by March 15. Although there's not much time left, there are lots of ways to spend FSA money. But one thing you can no longer buy with your FSA cash, or at least not as easily, is over-the-counter medications. Those purchases now require a doctor's prescription to be FSA reimbursable. (March 13, 2011)
- Writing off worthless stock -- The stock market's been on a tear of late, but we've all invested in something that just didn't turn out like we hoped. If you own a stock that's worthless, you might be able to get a little use of it by claiming it as a loss. When the stock is totally worthless -- no chance of it coming back from no value whatsoever -- treat it on your tax return as if it were a capital asset you sold for zero dollars on the last day of the tax year. Your worthless stock losses, either short-term or long-term, can offset capital gains dollar for dollar. Any excess capital losses can be used to reduce ordinary income, up to $3,000 per tax year. If your losses are more than three grand, first get a new broker then carry the excess capital losses forward to future tax years. (March 14, 2011)
- Zero capital gains taxes for some investors -- That's right. When some folks sell their long-term assets (property they've owned for more than a year), they won't owe the IRS a cent. Of course, this great tax break does have some limits. It's only available to taxpayers in the 10 percent and 15 percent income tax brackets. Higher earners will some benefit from this 0 percent capital gains rate, but not the full no-tax treatment. Young investors also are restricted to keep parents from shifting assets to their kids to avoid capital gains taxes. And the 0 percent rate isn't forever. It will end on Dec. 31, 2012. So make your investment plans accordingly. (March 15, 2011)
- Tax credits can help with college costs -- The price of college keeps going up, but two tax breaks, the American Opportunity credit and the Lifetime Learning credit, can help students and/or their parents defray some education expenses. As the names indicate, these educational assistance options are credits rather than deductions; they can reduce your tax bill dollar-for-dollar and, in some cases, get you a refund if you don't owe the IRS. The American Opportunity credit replaces the Hope credit, providing up to $2,500 in tax and education savings, with a possible $1,000 as a refund. It's limited to costs incurred in the first four years of university and expires at the end of 2012 unless Congress extends it. The Lifetime Learning credit, as its name indicates, covers costs beyond the undergraduate level. It's worth a possible $2,000 credit. Do your homework to see if you qualify for either credit. If you can do, you could earn a great tax-saving grade. (March 16, 2011)
- Deducting uncommon charitable contributions -- Most donations to charities are in the form of cash, which in the IRS' eyes includes paper checks and credit card gifts, or household goods. But there are more atypical ways to give and get a tax break. You can't write off the value of your time when you volunteer at a nonprofit, but your travel expenses getting to and from the volunteer location are deductible. So are out-of-pocket costs you pay to, for example, furnish a charitable group with much-needed supplies. And as you reevaluate your portfolio, consider giving an appreciated asset that no longer fits your investment plan. The charity can sell the stock without facing tax consequences and use the money for some of its projects. Meanwhile, your donation of a long-term holding gives you a charitable deduction claim at the full asset price at the time you donated it without you facing a capital gains bill. (March 17, 2011)
- Making the most of miscellaneous deductions -- As you search for as many tax write-offs as possible, don't forget about miscellaneous deductions. These are claimed in a special section of Schedule A. But there's one big drawback: your miscellaneous expenses must total more than 2 percent of your adjusted gross income, or AGI, before you can claim them. To get over the percentage hurdle, you can count a variety of unreimbursed employee expenses, investment-related fees, costs of managing or maintaining income-producing property and even tax preparation charges. (March 18, 2011)
- Get receipts for charitable donations -- A lot of folks right now are requesting donations, ranging from groups providing relief to Japan's earthquake and tsunami victims to Texas churches. If you feel compelled to give and would like to deduct your donation as an itemized expense on Schedule A, make sure you get a receipt. You don't have to submit the official receipt or some sort of acceptable substantiation substitute when you file your tax return. But if the IRS ever questions your itemized charitable gift deduction, you'll need that receipt or canceled check, credit card statement or cell phone bill for texted donations to prove your gift was legit. Without a receipt, a tax auditor can automatically disallow your deduction. (March 19, 2011)
- What's your tax bracket? -- When Congress was considering tax legislation at the end of 2010, much of the debate focused on tax brackets. The U.S. tax system is progressive, meaning income is taxed at certain rates that increase as earnings increase. There now are six tax rates with corresponding tax brackets. The lowest tax rate is 10 percent; the highest tax rate is 35 percent. The current tax rates are scheduled to remain in effect through 2012. The income ranges to which they apply are adjusted each year for inflation. Knowing your tax bracket and how close you are to the next, higher-rate one is critical to effective tax planning. Your financial decisions can help you avoid being pushed into a higher tax bracket. And when you can't prevent a tax rate increase, knowing that you might face one can help you make moves to lessen the tax blow. (March 20, 2011)
- Recovering excess Social Security taxes -- One of the larger tax bites from your paycheck goes to FICA, the Federal Insurance Contributions Act payroll collection that funds Social Security and Medicare. The Social Security amount is usually 6.2 percent of your pay (but only 4.2 percent in 2011 thanks to this year's payroll tax holiday), matched equally by our employer. That percentage is taken out of your earnings up to a certain wage base limit, which is $106,800 in 2010 and 2011; there is no income limit on the 1.45 percent Medicare portion of FICA taxes. When you hit the wage ceiling (good for you!), no more Social Security taxes. But if you held two jobs or changed workplaces, there's a possibility that Social Security payroll taxes could have been taken out on more than $106,800. In that case, you might be able to get the excess payments back by claiming the amount as a credit on your 1040 or 1040A tax return. (March 21, 2011)
- Coping with the complicated and costly AMT -- Three letters strike tax fear into the hearts of millions: AMT. That's the acronym for the alternative minimum tax, a parallel tax system with its own rates (26 percent and 28 percent) that was created in 1969 to ensure that wealthy taxpayers' income didn't escape taxation. But because the the AMT is not indexed for inflation, it has the potential to snare today's middle-income taxpayers. Congress has for years upped the income exclusion level (aka patched the tax) to protect some of the potential AMT victims, but some still end up paying the additional tax. In addition ot the inflation issue, many tax breaks that are allowed under the ordinary tax system can't be used when AMT is calculated. It's not easy to sidestep the AMT, but knowing what to look for, as well as what to look out for, can at least help you cope. (March 22, 2011)
- Meeting IRA withdrawal rules -- If you have a traditional IRA, you'll eventually have to take money out of it. And to ensure that you don't wait too long, the tax code has a required minimum distribution, or RMD, provision. This mandates that when the owner of a traditional IRA turns 70½, that older retirement account owner must start taking out at least a specific amount each year. The first RMD can be pushed to April 1 of the year following the triggering birthday. The reason for the withdrawal requirement is clear: Treasury wants the taxes, which are at the ordinary income tax rates, on this money that's been sitting around in tax-deferred status for years. 401(k)s and similar tax-deferred retirement plans also are subject to RMDs, but Roth accounts don't face any such mandatory withdrawal rules. (March 23, 2011)
- Deduct your home office expenses -- If you work from home, make the costs of your in-house workplace pay off at tax-filing time. I know, you've heard the home office deduction is automatic audit bait. It's not. And even if an IRS examiner does take a second look at your home office claim, you don't have to worry as long as your follow the rules and substantiate your deduction. The main requirement is that your home office area be used regularly and exclusively for your business needs. As for what you can count when you fill out Form 8829, eligible expenses include a portion of your real estate taxes, deductible mortgage interest, rent, utilities, insurance, depreciation, painting and repairs. The total amount you can deduct depends on the percentage of your home used for business. And your deduction is limited if your income from your business is less than all your business expenses. That's right, you can't use this deduct to zero out your taxable business earnings. (March 24, 2011)
- Small business filers get choice of Schedule C or C-EZ -- As the lone owner of an unincorporated small business, you are a sole proprietor. Your income is reported to the IRS on your personal 1040 via Schedule C or C-EZ. The choice of form depends on your earnings and your expenses. As the name indicates, Schedule C-EZ is a much simpler form. The first requirement for using it is business expenses of $5,000 or less. The longer Schedule C is what you'll want to use if you spend more on your operation, want to claim more of the many small business tax breaks (such as the home office deduction) or if you are reporting a business loss. You don't have to file the same form every filing season. If one year you meet the C-EZ guidelines, use it. If the next year, filing a Schedule C is works for your business, do that. The key is to pick the one that best fits your small business' filing situation each tax year. (March 25, 2011)
- Plugging gaps in your tax records -- You did remember to make a copy of your tax return, right? It doesn't have to be paper; digital copies are fine. But you need some record you can easily access in case the IRS has questions or a loan officer wants the info before she'll approve your new mortgage. If you don't have complete records of your past-year tax returns, you can get the information from the IRS. You have three options when it comes to tracking down your old tax data from Uncle Sam. The quickest and cheapest method is to ask for a tax transcript. Filing a Form 4506T-EZ will get you a synopsis of your filing data for the current and three previous years tax years. Most line items from your original individual tax returns will be there. If you use a fiscal tax year instead of a calendar tax year, you file a Form 4506-T. There is no charge for transcripts, you can request them online and the turnaround time is about two weeks. If, however, you need copies of your full past filings, submit a Form 4506. This will get you a photocopy of your tax return, along with copies of the accompanying documents you sent with your 1040. You must pay $57 for each tax year's request and you'll probably wait for about two months for the info to show up in your snail mail box. (March 26, 2011)
- Paying your tax bill with EFTPS -- Its official name is Electronic Federal Tax Payment System, but as is the way in Washington, it's usually referred to by its acronym EFTPS or "Eff-Tips." Whatever you call it, it's the IRS program that allows you to pay your tax bill, both any amount due with your annual filing as well as other payments estimated taxes, automatically and directly from your bank account. To use EFTPS you must establish an account. And that takes a while -- about seven business days -- because once you register at the EFTPS home page, the IRS sends you a password via snail mail before you can use the program to actually pay a tax bill. So if you're thinking about using EFTPS, plan accordingly and sign up in plenty of tax payment time. (March 27, 2011)
- Traditional IRA offers tax deduction for some filers -- When it comes to individual retirement accounts, the original traditional IRA usually gets short shrift. But for some taxpayers, it's works just fine at tax time. Not only do they save for their eventual post-work years, but they get an immediate tax deduction. Eligible traditional IRA contributors can subtract as an above-the-line deduction the money they put into their accounts, possibly up to the maximum $5,000 (or $6,000 for folks age 50 or older). This helps reduce gross income to the smaller adjusted gross income level, the first step to the lowest possible taxable income level. The full five or six grand deduction amount isn't guaranteed; the actual income adjustment depends on your income level and whether you have a retirement plan at work. But even a partial deduction of a traditional IRA contribution is a valuable tax break for many filers. And it's available up until the April filing deadline. (March 28, 2011)
- Roth IRA rules -- That headline does indeed have a dual meaning. For many folks, a Roth individual retirement account is the preferred personal retirement plan; it rules because when the money is eventually distributed, it's tax free. But to get to that point, you have to follow the rules on setting up and contributing to a Roth IRA. Most of the Roth regulations have to do with earnings. As with any IRA, you have to have wage income to open an account. And the $100,000 income limit on converting a traditional IRA to a Roth IRA is history. But if you make too much money, you're not eligible to establish a new Roth or to contribute to the account you opened when you were earning less. If you do, however, meet the Roth rules, you can put up $5,000 (or $6,000 if you're age 50 or older) into the IRA. And you still have until the April filing deadline to open a Roth or make a contribution and have it count toward the 2010 tax year. (March 29, 2011)
- When the IRS says it's OK to tap your IRA -- Sometimes you just have to break into your nest egg. When that happens, you have to pay any taxes that have been deferred on your IRA earnings. You also might face a penalty for taking out the money before you reach retirement age. But in some cases, the IRS says it's OK to raid your IRA. Yes, you'll have to pay any due taxes, but you won't face additional penalties. Allowable penalty-free early distributions include using some of the money to buy your first home, to pay for qualified higher education expenses and in hardship situations to pay for things like extreme medical bills. The bottom line is to try to leave your retirement funds alone, but if you just can't, know when taking some money out won't cost you even more. (March 30, 2011
- Retirement savers' tax credit rewards nest egg efforts -- You're saving for tomorrow, but you might be able to get a tax break for your long-range planning today. The retirement savings contributions credit, also called the saver's credit, appears on Form 1040 and Form 1040A tax returns as a way for lower-wage earners to get tax money for socking away retirement money. Since it's a credit instead of a deduction, you get a dollar-for-dollar break on your IRS bill. All you have to do is contribute to an IRA, Roth or traditional, or a company-sponsored retirement plan. You contribution amount, up to $2,000, can net your a $1,000 tax credit. Details on claiming the credit, as well as income limits, are found on Form 8880, Credit for Qualified Retirement Savings Contributions. (March 31, 2011)
Again, thanks for continuing on our filing season long tax tip journey. Once we wrap up March, we'll finish out the filing season with 18 tips for April.