Ah, spring. Time for showers, flowers and those headache-producing income tax forms. This year’s tax season could be more complicated than most, because the government’s various efforts at economic stimulus have added some new provisions to the already bulky tax code. But that’s good news—it means there are some new tax breaks, if you know where to find them.
Here’s a guide to the nooks and crannies that hide valuable tax breaks, as well as other tips for getting your taxes filed easily and inexpensively. You might want to check out the excellent IRS website and dig for details on your own.
• Catch up on last year’s rebate. Remember those rebate checks? People who earned less than $75,000 ($150,000 for married couples) in 2007 got $600 ($1,200 for married couples, $300 if they were retired) in a check from Uncle Sam early in 2008. If you didn’t get one then, you may still have one coming to you. If you earned too much in 2007, but saw your 2008 income fall below those levels, you can claim a recovery rebate credit on your 1040 now. If you never filed a tax return in 2007, you can file an abbreviated tax return to get that rebate now.
• Take “above the line” deductions. Even if you take the standard deduction instead of itemizing, there are some items that you can still write off. A new provision lets you subtract as much as $500 ($1,000 for married couples) from your taxable income for property taxes, on top of the standard deduction, reports Mark Steber, vice president of tax resources for Jackson Hewitt Tax Service. “This is new, and absolutely aimed at seniors,” he notes.
Other items that you can write off along with the standard deduction are up to $4,000 in college costs that you pay for yourself or your dependent child, contributions to your health savings account and moving expenses, if you moved last year to take a new job. Check the fine print, or let your tax preparer or software do that for you; each provision comes with its own income limitations and other rules.
• Don’t overlook the deductible IRA. Income limitations that kept many working people from making tax-deductible contributions to individual retirement accounts have gone up over the years, and so has the allowable deduction for IRAs, says Barbara Weltman, with tax publisher J.K. Lasser. Those factors–and everyone’s shrinking retirement accounts–make feeding your IRA more valuable than ever. You have until April 15, 2009, to contribute up to $5,000 ($6,000 if you’re over 50) that will be deductible on your 2008 taxes. This is true even if you’re covered by a retirement plan at work, if you make less than $53,000 ($85,000 for couples who are both covered at work).
• If you’ve had troubles, Uncle Sam might help. If you’ve reworked your mortgage, been foreclosed upon or negotiated a short sale for a house that had dropped in value, you might be able to get a tax break. Typically, the amount of debt that gets forgiven is considered taxable income, but it will go tax free in 2008. People who suffered losses in last summer’s floods and windstorms also get help with their claims for losses, education spending, charitable giving and home rehabs—check IRS publication 4492B for all the fine print.
• Itemizers can load up on deductions. res who live in states that have high sales taxes and no (or low) income taxes can opt to deduct their sales taxes instead of income taxes, if they itemize. This break was slated to expire but was extended through 2008.
Other deductions that often get forgotten include mileage when you use your car for charitable work; early withdrawal penalties you may have paid to get money out of a bank certificate before it matured; and tons of medical expenses, including eyeglasses, chiropractic fees and Medicare Part B premiums. (Your health care costs must top 7.5 percent of your adjusted gross income before you can deduct them, but with the cost of health care today, it’s amazing how quickly they add up.) It’s well worth taking a look at IRS publication 502, Medical and Dental Expenses, to see the laundry list of items that qualify.
Help for caretakers
• If you’re supporting your parents, you can claim them as dependents, even if they aren’t living with you. You do have to be paying more than 50 percent of their annual support, says Abe Schneier, senior technical manager of taxation for the American Institute of Certified Public Accountants. If several siblings are all contributing to Mom’s or Dad’s care and their total tops 50 percent, they can decide which sibling claims the parent as a dependent each year, and that can rotate or stay with the same sibling. The sibling who claims the parent must have provided at least 10 percent of the care. When you claim a parent as a dependent, you can add all of the parent’s deductible medical expenses to your own.
If you spend money on senior day care for your parents while you work, and if you claim them as dependents, you may qualify for a dependent care credit. That credit reduces your taxes by $600 to $1,200, depending on how much you earn, how many dependents you have and how much you spend on their care. You can’t deduct the cost of a caretaker as a medical expense if you’ve used it to claim this credit.
• Assisted living costs may be deductible. If your parents need to live in an assisted living facility to receive medical care, many of their costs, including room, rent and meals, become deductible—the rules are spelled out in the IRS publication 502. Those items are not deductible if they simply live there for comfort and convenience rather than for medical care, and some of their costs, such as for haircuts or pleasure outings, are not deductible at all. If your parent is your dependent, you can take those allowable deductions. If not, your parent can deduct them.
What to watch out for
• Scams. Even more important than squeezing every last penny out of your tax bill is protecting the money you have from scam artists who operate during tax season when identity theft peaks, according to the Identity Theft Resource Center. To protect yourself, don’t give personal information, such as your Social Security number, to anyone who calls or e-mails and asks about your tax situation. The IRS doesn’t do that—it will send a letter. If you’re not sure about an inquiry, contact the IRS directly.
• Skip the refund anticipation loans. Tax preparers offer these “instant” refunds to taxpayers who don’t want to wait the few weeks it takes to get their money from the IRS. But when all the fees are added up, they have effective interest rates of between 50 percent to nearly 1,300 percent, according to several consumer groups that have warned against these products. If you file your return electronically and authorize the IRS to deposit your refund directly into your bank account, you should get your refund in two or three weeks. Don’t fall for e-mails that say “your refund is ready!” and then require you to send additional money before you get your refund. It’s a scam.
• Don’t turn into a scammer yourself. Understand that some tax preparers are too aggressive and may cross the line, putting their clients into jeopardy. You shouldn’t try to get out of paying your fair share by buying into arguments like these: The income tax system is illegal or voluntary; you don’t have to pay to support programs or wars you don’t agree with; offshore bank accounts and living trusts will eliminate your tax bill. That’s all false, and can get you into serious trouble. Those are the kinds of headaches you don’t need.
Where to get help
It’s worth getting expert advice on your taxes, especially when it’s free. People who earn under $56,000 can get free tax preparation and filing from a variety of companies directly through the IRS website; click on “free file.” AARP’s own Tax-Aide program puts trained tax experts in your neighborhood to answer questions and help you fill out your forms.
If you have complex tax issues and want to hire your own tax pro, look for a certified public accountant, tax attorney or enrolled agent to handle your return. Or, software is available if you like to do it yourself.
Whatever way you go, look over your forms carefully before you file them—you might learn something about your tax situation or catch a last-minute mistake, like that most common refund-delaying blunder: forgetting to sign your return.
Linda Stern is a freelance journalist who enjoys writing about taxes.