Daily Tax Tips for January 2011

It's tax filing time again.

Whether you need some help finishing up your 2010 tax return or are looking for some tax planning strategies to reduce your 2011 tax bill, you've come to the right place.

Daily Tax Tips for 2011 offers a tip a day through the main filing season, which runs this year until midnight on April 18.

Here you'll find a new tax tip, many courtesy of Bankrate's annual tax guide, along with some original Don't Mess With Taxes tips, every day.

That's right. This year we're going the IRS one better; we're not taking off weekends or federal holidays!

So be on the lookout for the day's featured tip in the upper right corner of the ol' blog.

And if you miss one or simply want a refresher, bookmark this page and come back at your leisure to check out the running list of Daily Tax Tips for 2011.

Because there are so many tips, I've broken them into separate pages for each month of the filing season. Below are the 27 daily tips for January. At the end of the list, you'll find links to tips for February, March and April (through this year's tax-filing deadline of April 18) as those months arrive.

1. 7 ways to get organized for the tax year -- The new tax filing season has arrived! The IRS will soon start accepting returns from most taxpayers. You can make sure the process goes smoothly for you by doing a bit of preparation before you actually start filling out your 2010 Form 1040 or 1040A or 1010EZ. (Jan. 5, 2011)
   
2. Do you have to file a tax return? -- Probably. Most of us do. But some folks escape this task. Whether the IRS demands a 1040 from you depends on a combination of your age, your filing status and your income. And even if you're not legally required to file, you might want to in order to get a refund. (Jan. 6, 2011)
3. What's your filing status? -- It may sound like a simple question, but the correct answer could make a big difference in how much you owe the IRS. You have five choices on how you can file your taxes. Each offers certain filing advantages, or limits, to those who qualify, so make sure you pick the correct one. (Jan. 7, 2011)
4. Don't overlook the tax advantages of volunteering -- Do you spend your weekends working for a charitable organization? Although you give of yourself because you want to, it's also nice when such hands-on generosity provides a tax break. The bad news is that you can't write off your personal time you spend working for an IRS-approved nonprofit. The good news, though, is that you might be able to deduct some other costs associated with your volunteer efforts. (Jan. 8, 2011)
5. Driving home tax deductions -- When you travel for specific, IRS-approved purposes, you might be able to deduct that travel. Every year, the IRS announces the standard optional mileage rate that you can use to figure deductible driving expenses for travel related to business, moving, receiving medical treatments and doing charitable work. Once you confirm that your road trip can be deducted, be sure to keep good records of your travel. (Jan. 9, 2011)
6. Picking the proper 1040 -- You can choose from three tax returns, the long 1040, the 1040A and the simplest 1040EZ. Each has certain requirements. You should pick the easiest one that fits your filing situation. But choose carefully. The differences in these returns could cost you if you're not paying attention. (Jan. 10, 2011)
7. What's your tax bracket? -- There are six tax brackets into which your ordinary income (that's typically the money you earn at work) can fall. While we usually say we're in a particular tax bracket based on our gross earnings amount, not all your money is taxed at that last rate. Because of our progressive tax system, you dollars are taxed at multiple rates. Check them all out in this table. (Jan. 11, 2011)
8. Choosing between the standard deduction or itemizing -- Deductions reduce your taxable income. And less income usually means you pay less to the IRS. So it's important to pick the deduction method that saves you the most. Which deduction method you choose depends on your persona tax circumstances. Most taxpayers use the standard deduction, which is found directly on the 1040 or 1040A (and is included with the exemption amount on the 1040EZ), and adjusted annually to reflect inflation. But in some cases, detailing your expenses as itemized deductions on Schedule A is more tax worthwhile. So take a look at both options and make sure you pick the one that saves you the most tax dollars. (Jan. 12, 2011)
9. Picking tax preparation software -- Taxpayers who prepare their own tax returns using their home computers has for years been the fastest growing e-filing sector. Last year, the IRS received almost 35 million returns from folks who used tax software on their own and then e-filed. If you want to join that crowd, make sure you pick the tax software option that best fits your filing needs. (Jan. 13, 2011)
10. E-file your tax return -- The IRS began accepting electronically filed tax returns on Jan. 14. If you haven't joined the millions who e-file, what are you waiting for? There are several ways you can do so: do it yourself with tax software loaded on your own home computer, use online tax prep and filing options, hire a tax pro to e-file for you or, if you meet the eligibility guidelines, use the IRS' Free File website. (Jan. 14, 2011)
11. January is estimated tax time -- So is April and June and September. In each of these months, if you have income that isn't subject to payroll withholding taxes, then you should send the IRS a 1040-ES voucher and tax payment. It's how our tax system, which operates on a pay-as-you-earn premise, gets money to the Treasury throughout the year instead of in one big lump some at regular tax return filing time. As you make your final prior tax year estimated tax payment in January, it's also a good time to look at what your upcoming 1040-ES obligations will be. Early planning will save you from a big tax-due surprise in April, June, September and next January. (Jan. 15, 2011)
12. Organize your tax material -- Now, as you're preparing to file your tax return, is the perfect time to set up a tax record keeping system. You need all of last year's receipts to determine what you can deduct. Your income statements have already started trickling in to your e-mail or snail mail box. You've taken the first step by putting them all in one place. Now go further and actually organize them into separate files. When you're through with last year's Form 1040, you'll have the filing infrastructure in place to collect all of this year's tax data well ahead of time. And that info will give you an idea of any later year tax moves you can make to reduce this year's tax bill. (Jan. 16, 2011)
13. Be charitable -- Today is MLK Day, a national day of service, and many folks will be volunteering at their favorite nonprofit. Some costs associated with giving of your time are deductible. Others, however, will donate via financial gifts. Those contributions also can pay off for the giver at tax time via charitable tax deductions on Schedule A. The key, whether you donate your skills and time or give cash (which includes checks and giving via credit card), is knowing the IRS rules on charitable tax deductions so that your charitable gifts will benefit you, too, at tax-filing time. (Jan. 17, 2011)
14. Learn the language of taxes -- Everybody always complains about math in connection with taxes, but there's also a linguistics issue. You can't do the addition, subtraction, multiplication, etc., until you understand what figures you need. And that means you need to learn a new language: Taxes. 10 key tax terms to knows offers a primer on this strange new way of communicating with Uncle Sam. You also can check out the ol' blog's Tax Glossary, which admittedly is a little lean, but is a start and which I promise will eventually be finished. (Jan. 18, 2011)
15. The tax value of dependents -- If you have kids, you know that claiming them as dependents can pay off at tax time. Even without any associated tax credits, you automatically get tax-saving exemptions for your minor children. But your older children and other relatives also might qualify as your dependents for tax purposes. Of course there are rules to be met. But check them out. If you're helping support family, make sure that you're at least getting some tax payback for it! (Jan. 19, 2011)
16. Make sure your kids are a tax credit to you -- It's expensive raising a family, but Uncle Sam wants to help. No, he won't babysit, but he offers the child tax credit and additional child tax credit. The savings from those -- the child tax credit is $1,000 per kid; the additional credit might get you some money back as a refund -- should help you pay for not only the teenager to watch your brood for a few hours, but also the night out itself! (Jan. 20, 2011)
17. Ways to receive your tax refund -- As more taxpayers have turned to e-filing, they also are using direct deposit to get their refunds. The main reason is because having the money sent to your bank account is much faster than waiting for a paper check to show up in your snail mail box. In recent years, the IRS has expanded its electronic refund options. You now can split the cash you get back from the IRS among three accounts, including an IRA. You also can get your refund converted to Series I savings bonds. And with the IRA and savings bond refund choices, you won't be tempted to spend your tax cash on frivolous items. (Jan. 21, 2011)
18. Taxes and unemployment -- Tax considerations don't stop when you're unemployed. In some instances, the tax code will cost unemployed individuals. Unemployment benefits, for example, are taxable income. But in other cases, tax laws could help ease, at least a bit, the financial strains of being without work. You now might qualify for tax breaks, such as the Earned Income Tax Credit, or be able to qualify for hardship withdrawals from your retirement accounts, allowing you to get to the money without  paying an early distributions penalty. (Jan. 22, 2011)
19. Pay attention to your tax rate and income tax bracket -- As taxpayers, we obsess over which tax bracket our income falls into. But just because we make an amount that's in, say, the 25 percent tax bracket, that doesn't mean we pay the IRS 25 percent of our earnings. Because the U.S. tax system is progressive, taxes are assessed at the various tax rates into which portions of our income fall. Knowing your marginal, or top tax rate, and your effective or average tax rate can help you avoid tax filing surprises. Knowing your tax rate(s) also is important in developing a strategy to pay Uncle Sam less. Although your average tax rate might end up to be relatively small, you'll want to assess how financial moves might push up your marginal, or highest possible, tax rate. So pay attention to your various tax rates throughout the year, not just at tax-filing time. (Jan. 23, 2011)
20. Getting tax help in taking care of an aging parent -- My mom is now living nearer me than at any other time in my adult life. She's on her own, but having her so close has me thinking about a time when she might need more help from me. When that happens, I plan to turn to the tax code for assistance with my added parental care efforts. The needs of elderly parents is not a topic we like to think about, but it's better to plan ahead than to deal with such financial and tax issues under crisis conditions. (Jan. 24, 2011)
21. Don't overlook your nanny tax duties -- Did you pay a housekeeper, gardener or, yes, a nanny last year? Then you might have to deal with the nanny tax. Despite the popular nickname, this tax covers all types of around-the-house employees you hire. We're not talking contractors here, but actual employees. And in those cases, as an employer you are responsible for paying Social Security, Medicare and unemployment taxes, as well as possible state taxes, for your household employees. (Jan. 25, 2001)
22. Don't wash away your stock sale tax break -- Did you dump some underperforming stocks so you could use those losses to offset capital gains or even reduce a part of your ordinary income? Good for you. But don't go and lose that tax advantage by buying back the stock or a substantially similar one too soon. The wash sale rule will disallow those loss claims, at least on your most recent tax return. Basically, the rule is designed to keep you from making investment decisions simply to create tax losses. Or, as the old saying goes, neither the IRS nor your financial adviser want you to let the tax tail wag the dog! (Jan. 26, 2011)
23. Be on the lookout for tax statements -- You can't file your tax return until you get all your income information. That data should be in your hands soon. Jan. 31 is the deadline for employers and account holders to send out their annual tax statements. Some still arrive the old-fashioned way via the U.S. Postal Service. But many of us now get our financial -- and tax -- statements by e-mail. So be sure to check both your curbside and e-mail boxes. And double check the statements as soon as they arrive. If there's a mistake, you have time to have a corrected tax document reissued. (Jan. 27, 2011)
24. What to do if you don't get a W-2 -- The key tax document for most folks is the W-2. This is the annual statement from your employer detailing how much you made and how much in taxes you already paid through payroll withholding. The IRS requires you to include this document, whether you file electronically or by paper, with your tax return. So what do you do if your boss hasn't sent you your W-2 yet? You can bug the heck out of your firm's payroll office. And if that doesn't work, you can create a substitute W-2. (Jan. 28, 2011)
25. Contribute to your retirement accounts -- If you want to spend your post-work years comfortably, you need to be contributing now to your retirement accounts, both your IRA(s) and workplace plans. You can contribute to an IRA for the previous tax year up through the current tax-filing season's deadline. This year, that's April 18. Once you max out your 2010 contribution amount, which for some folks could be deductible on this year's tax return, then start contributing for 2011. The amounts you can put into an IRA, ether Roth or traditional, remain the same in 2011 thanks to low inflation. That's $5,000 or $6,000 if you're age 50 or older. And remember, inflation will be back, eating into your savings. So start stashing as much retirement cash as you can now! (Jan. 29, 2011)
26. Go electronic this tax season -- Most of us are wired in our daily lives, so it only makes sense to go electronic at tax time. Not only can you e-file your federal tax return, but there are smartphone apps to help. Heck, even the IRS has an app for taxes! If you're getting a refund, having it directly deposited will get you your tax cash sooner. The IRS is added a prepad debit card so that folks without bank accounts can get their refunds that way instead of a paper check. And even your tax records are electronic. Most companies and employers nowadays deliver tax statements (W-2s, 1099s) via e-mail or making them downloadable from websites. As for your personal records, if you don't want stacks of paper, scan the receipts and other tax material and save your tax documentation digitally. And don't forget your state taxes. Every state (and most county and city) tax offices have a website and allow (or even require) you file and pay your local taxes online. Yep, taxes, like the rest of the world, are online. Join us! (Jan. 30, 2011)
27. Working around missing 1099s -- If you received interest or dividend income, sold a stock or worked as an independent contractor, you should soon receive some version of Form 1099. Just like W-2 wage statements, 1099 forms are to be sent out by the end of January. Just like W-2s, you need the 1099 data to file your tax return. And just like W-2s, sometimes they don't show up in a timely manner. Unlike W-2s, you don't have to include the 1099s with your tax filing, so it makes it a bit easier to work around these slow-to-arrive tax forms. Start by nagging the issuer; you might want to ask them to send another copy. But even without the official statement, you often can find the information on your end-of-the year statements. You can use that data to file. Of course, when the official 1099 does arrive, if it's got a different amount, be sure to file an amended return so that the IRS won't be bugging you about the difference. (Jan. 31, 2011)
    

Whew! What a tax month! But wait! There's more! Check out the continuing list of 2011's Daily Tax Tips, the links for each new month of this filing season appearing below as they arrive:

Daily Tax Tips for February 2011

Daily Tax Tips for March 2011

Daily Tax Tips for April 2011

Still can't get enough tax tips? Check out the rest of the news and advice at Bankrate's 2011 Tax Guide, as well as Don't Mess With Taxes' ever-growing collection of tax tips.

Comments

[Jeff Fouts]

Thanks for the easy to read tax tips.

[Seminole CPA]

Wow! What a great source of information. I've enjoyed skimming through this blog. It's obviously you know your stuff. Hopefully I'll stumble upon your blog again one day.

Joe @ http://suncoastcpas.com/

[Camille Gaines]

Thanks, Kay, for the tips for 2011. You know your stuff!