As I mentioned the other week, I spoke to Bob Meighan, TurboTax’s Vice President and CPA, last week about ways to lower your tax bill and more. We spoke about different scenarios for couples, whether they’re parents for the first time, homeowners, or taking a new job. He then went over tax credit and deductions that you can take advantage of when you file you taxes next year.
The great things about using these credits and deductions is that you’re maximizing what’s already out there. It’s not about finding loopholes, it’s legal ways to boost your refund or at least lower your tax obligations.
Tax Credits vs Deductions
Some people think that tax credits and deductions are the same. That’s not true; there are some subtle differences and knowing them can help you tremendously. Tax deductions are slightly different because they reduce your taxable income, not the tax burden that you owe. Tax credits lower your tax bill.
Bob pointed out that the average refund last year was around $4,000. That can be a helpful windfall for many people in these economic times. To that end, it’s important to know what you include with your tax filings. Depending your own circumstances, you can qualify for various tax credits and deductions. I’ll list a few of them here.
Becoming Home Owners
There are some pretty big tax breaks for home owners. The biggest one is the mortgage interest deduction.
Mortgage Interest Deduction
As a reminder, to deduct your mortgage interest you must itemize your deductions. If you’re interested in finding out the deduction limit and income phaseout for mortgage interest, please check IRS Publication 936 for more information.
Did you know that there was a casualty loss deduction available? I didn’t know, but Bob mentioned it with this year being filled with a couple of disasters in the United States. It covers your total loss (minus $100 and whatever your insurance reimbursed you for). For those rocked by the crazy weather disasters this can be a huge relief.
This deduction is not only for homeowners, but they can benefit from this greatly with property damages.
For 2011 you can deduct $3,700 for each exemption on your tax return. That helps you as it will reduce your taxable income (though not your liability).
Child Care Credit
This credit can help you with dependent care. If you have pay someone to watch over your children, such as daycare.
The maximum you can claim with each child (provided they qualify) is $1,000. Bob also mentioned that some parents may not take advantage of the credit even if they qualify. They don’t think summer camp qualifies even though it could.
You can deduct medical expenses whether you have kids or not, but it’s easier to meet the AGI requirement when you take into account the family’s medical and dental expenses. The IRS requires that your expenses exceed 7.5% of your adjusted gross income.
Looking over the IRS’ list of eligible expenses, I noticed a few that could apply to our family:
Contact Lens: I have pretty bad vision since I was a kid. I have a heard time seeing the giant “E” on the chart without help. I perfer to use contacts, so I will be purchasing some this upcoming year.
Eyeglasses: As a back up every few years I get a pair of eyeglasses. It’s about time to replace the ones that I got. I’ll shop around to get an idea of what to expect. Since my vision is bad, it costs extra to thin the lens down.
Insurance Premiums: We pay every month, so it would be nice to deduct this expense.
Laboratory Expenses: If your doctor refers you to get lab tests done, you can include that as an eligible medical expense.
Lactation Expenses: A recent change in law allows you to deduct your breast pump and other location supplies.
Medicines: If prescribed by your doctor, OTC and pharmacy medicines are included for your FSA.
Physical Examinations: Your annual physical exam is an eligible medical expense according to the IRS.
I feel better knowing we may see some of the money back in a few months.
Starting a Business
From the emails and chats in forums I know a good portion of you have a business. Many of you work from home to supplemental your main income.
When we were speaking about it he pointed out that people aren’t optimizing their home office deductions. If you’re entitled to it, then by all means claim it. Keep records and have everything documented and you should be fine.
Keep Estimated Taxes in Mind
Bob also mentioned that some people don’t keep on top of their estimated taxes. This important because not only will you be hit with a big tax bill when you file, you’ll also incur penalties for being late. To help you keep these dates in mind, use calender reminders to send in your payments. Estimated taxes are due on an almost quarterly basis.