The 3 biggest implications of new tax laws in 2013

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By Emma Underwood

There are changes on the 2013 1040 form that will affect the amount of federal income tax many people pay this year. Just about every taxpayer will be affected one way or another by these changes to the tax codes.

What specifically are those changes, and who will be affected the most by each individual change?

1. Payroll taxes:

Most working people took home less money in January 2013 than they did in December 2012, even if they were earning the same amount of money. That's because Congress allowed the payroll tax holiday to expire.

The Social Security tax withdrawn from paychecks has traditionally been 6.2 percent. In December 2010, however, Congress enacted a two percent payroll deduction. There is some political controversy over whether or not this cut was intended to be temporary. Most Democrats argue that the payroll reduction was a temporary measure; some Republicans argue otherwise. Be that as it may, the entire 6.2 percent is now being withheld, and the Social Security wage ceiling has been raised to $113,700.

Additionally, high earners will see a raise in the amount of Medicare tax withheld from their paychecks. For people earning more than $200,000 a year, an additional 0.9 percent will be withheld.

Finally, self-employed individuals who have been paying a self-employment tax of 10.4 percent since 2010 will see their self-employment taxes rise back up to 12.4 percent in 2013.

2. Higher capital gains taxes for higher earners:

Gains from the sale of assets held for one year or less will no longer qualify for long-term capital gains tax treatment.

For single individuals who earn $400,000 a year or more, and for married couples filing jointly who earn $450,000 a year or more, capital gains taxes will now be 20 percent instead of 15 percent.

This may have a visible effect on the purchases and sales of stocks and other financial assets. Higher taxes means less money to invest in the stock market and other investment opportunities, which in turn means less opportunity to benefit from asset appreciation.

Additionally, households with adjusted gross incomes of $200,000 (single filer) or $250,000 (joint filer) are now subject to the 3.8 percent surtax that was passed in 2010 as part of the new health care legislation. This could conceivably drive capital gains taxes for some individuals up to a rate of 23.8 percent.

The new tax bracket for individuals earning $400,000 or more, and couples filing jointly earning $450,000 or more, is now 39.6 percent, up from 35 percent. However, this will not affect people filing their 2012 taxes.

3. Changes in deductions and exemptions:

Congress also enacted a great many changes in the ways that deductions operate. People at the high end of the earning spectrum will no longer be allowed to take all their itemized deductions. Those cut off points are $250,000 for single individuals, $275,000 for individuals filing as heads of households, and $300,000 for married couples filing jointly.

The itemized deductions that are subject to this phase-out include:

• Charitable contributions
• Job-related expenses
• Other taxes
• Interest (but not investment interest)

The rules for calculating the new rates for itemized deductions as they are being phased out are very complicated. Higher income earners will also be hit by a reduction in the personal exemption to which they hitherto have been entitled.

About the author: Emma Underwood is an economist and guest author at How Do I Become A..., where she contributed to the online How Do I Become An Economist guide.

Taxes and Deductions for Business Office Equipment

Depending on how long business office equipment will last and its total value, equipment tax deductions can be taken via partial or full expensing or by depreciating asset worth. Although these deductions do not typically eliminate all taxes, they can help businesses lower total taxes due.

Complete article link: http://smallbusiness.chron.com/taxes-office-equipment-22278.html

Guide to Home Office Tax Deductions

The home office deduction can be used when a business is run out of the home in the form of a sole proprietorship . For the tax deductions to quality, the office must be used exclusively for business purposes which do not include non-profit activities or non-business activities that may be profitable. Generally speaking, for the business to qualify as such, the home office must be used regularly to service clients for profitable gain. This article will illustrate the forms needed to file home office deductions in addition to the types of deductions the proprietor can take.

Tax forms

In the United States the Internal Revenue Service and U.S. Department of the Treasury oversee the implementation of tax laws and regulations through efforts to make the public aware of the requirements placed upon their income whether it be business, personal or otherwise. This being the case, the IRS has specific forms required for filing home office deductions. A useful publication for further understanding the IRS regulations regarding home office deductions is called publication 587.

Specifically, this form required by the IRS for home office deductions is an addendum to the form 1040 known as form 8829. Form 8829 is entitled 'Expenses for Business Use of Your Home' and must be filed by April 15 of a given tax year if no extension has been applied for and approved. In addition to form 8829 the proprietor must also submit all other required forms such as the 1040, 1099's, W-2's, Schedule C's etc. depending on one's specific tax situation. If one is an employee using part of the home exclusively for employment purposes a form 2106 may be used in addition to the form 1040 and other form requirements.

Types of businesses that qualify

There are many types of business types that may qualify for a home office deduction including day care facilities, landscaping businesses, cleaning companies, consulting or counseling proprietorship etc. Areas of homes and built in apartments can also qualify as home office business deductions when the area is used solely for a rental business.

In the case of employees, telecommuters such as computer programmers, customer service representatives and freelance artists may also qualify for at home business deductions. There art two exceptions to the exclusive use qualification according to the Internal Revenue Service. These exceptions are use of space for business inventory and daycare operations. For more detailed information about qualifying it may be advisable to consult the IRS Publication 587.

Home office tax deductions

The good part of home office deductions is they can be deducted from income in addition to the standard 1040 deductions making one's taxable income potentially very low. In the case of mortgage interest deductions and overhead expenses such as electricity or gas, the square footage percentage of the home is first calculated, then that percentage is multiplied by the total mortgage interest and overhead expense to arrive at the deductible business portion of the expense.

Additional deductions include insurance expenses, real estate taxes, repairs and/or maintenance, utilities, "listed equipment" depreciation, and allowable "other" and operating expenses. Listed equipment may include computers, furniture, fax machines etc. that are used more than 50% of the time for the business or businesses in question. In other words, while space must be used 100% of the time, with the aforementioned exceptions, equipment only has to be used 50% or more of the time. Other expenses not included on the form 8829 can be listed on form Schedule C of the 1040 which includes expense deductions such as advertising, employee expenses, businesses services received and equipment maintenance.

Home office deductions can be a great way to make use of extra space as an income tax deduction. Such deductions should not be abused or used dishonestly as this would be tax fraud. For the home office to qualify for deductions it must be an area of the home used solely for the purpose of business. Equipment used in that space only has to be used 50% or more of the time for that business. The space must be used consistently for business use and two exceptions to the sole use requirement exist with the cases of business inventory storage and day care facilities.

Types of Tax Breaks For Small Businesses

Tax breaks reduce taxes owed to a government by an entity such as a small business. Different types of tax breaks for small businesses in the U.S. come in the form of tax deductions and tax credits and include a wide range of expenses and expenditures incurred by a business. The reason why the various types of tax breaks for small businesses are so useful is because they 1) reduce or eliminate taxation of business operating expenses and 2) can help preserve business retained revenue. The remainder of this article will outline business tax breaks and the process by which they are sometimes claimed.

Deductible business expenses

Amount the types of tax breaks available to sole proprietorships, LLC’s and partnerships are business expenses. These expenses take the form of deductions to taxable income which means a smaller amount of income will be taxed at a given tax rate after the deduction is granted. An example of a deduction available to sole proprietorships, S-corporations and partnerships are expenses for 1) licenses and 2) interest.

Tax deductible business expenses are costs incurred in the operating of the business, and are subject to specific tax regulations that should be complied with  before claiming the deduction. Even though some business operating costs are deductible doesn’t necessarily mean they are worthwhile expenses because the tax benefit is only a fraction of the actual cost. For example, if a business purchases a new antique diamond studded office fish tank for $10,000 thinking the cost can be written of through taxes, they may be in for a surprise. That office expense may not only be non-deductible; and if it is deductible may only reduce cost by the 15%-35% tax rate, or $1,500-$3,000 which that business is taxed.

Business tax credits

Being aware of the available types of tax credits is a good step in both tax planning and strategy in addition to tax filing. Not claiming tax credits can be costly to a business making the time and research used in becoming cognizant of  business tax credits potentially worthwhile. As with business expenses, identifying which IRS forms and publications apply to a specific business is helpful in identifying the most clear business tax credits qualified for. A few places to start looking for business tax credits are listed below:

(1) IRS Business Tax Credit information page
(2) U.S. Code on Tax Credits
(3) Tax strategy review
(4) Offshore business tax strategy
(5) State Departments of Revenue

Types of tax credits for small businesses may also be added or eliminated with changes to legislation in each new tax year. Generally, these changes to the tax law are updated by the IRS through edits on the relevant tax forms. However, it can be helpful to be familiar and up to date with available tax credits in case they are not clearly marked on the standard business tax return forms. Additionally, even though a space may be present on the Form, the information about the tax credit may be in a different IRS publication. For example, on the 2009 Form 1120-S is a line for other credits on line 13g. This line refers the tax filer to the instructions for form 1120-S. Thus, taking the time to read and be aware of multiple source on business tax credits may be beneficial to business retained income.

How to claim business tax breaks

Business tax breaks vary between the business types; for example, sole proprietorships are not necessarily subject to the same tax benefits as a partnership or limited liability corporation (LLC). So accordingly, an important step is determining the type of business for which the tax breaks are for. Each business type has different tax forms issued by the U.S. Internal Revenue Service (IRS). For example, an S-Corporation or small business is required to complete a Form 1120-S.

Step 1: Identify business type
Step 2: Locate correct tax forms
Step 3: Assess and research tax breaks 
Step 4: Apply tax break(s) to business tax return

The business tax forms that may be required include (1) Form 1040 Schedule C for sole proprietorships, (2) Form 1120-S for S-Corporations, (3) Form 1065 for business partnerships, and (4) Either a Form 1065, Form 1120, or Form 1040 Schedule C, depending on the type of LLC. For example, a limited liability corporation may have only one person who owns the business and who fulfills all the executive roles which may require the 1040 Schedule C be filed rather than a Form1120-S. The following link provides a more complete list and illustration of LLC tax filing classification.

Source: http://www.irs.gov (U.S. Internal Revenue Service)

Ways to save on taxes

There are several ways to save taxes in any given fiscal year. The earlier in the year one starts thinking and preparing about taxes, the more options one has to save on taxes. Lowering taxes can be achieved in every income bracket level with the right tax savings awareness and strategy. This article will demonstrate some of the possible steps that may lead to lower taxes in terms of 1) tax information, 2) common tax strategies, 3) lowering adjusted gross income, and 4) other non-income tax techniques.

Tax information

A good first step in saving on taxes is to have access to the right information. To gather the right information it can first be a good idea to estimate adjusted gross income, tax deductions and any tax credits one has in the case of 1040's, the standard U.S. Individual tax form. From there, one can determine what tax bracket one is in, for example 15 percent.

Tax information can be obtained from a number of sources including the U.S. Internal Revenue Service, county tax offices, tax accountants, financial advisors, tax attorneys etc. The difference between tax information and tax advice is that advice must be obtained specifically from certified and/or licensed tax professionals. The more pertinent information one has in regard to saving money on taxes the better because then one can apply that information to a tax saving strategy.

Tax saving strategies

There are several ways taxes can be saved either through a strategy, or tax savings tactics, or both. Tax strategy involves a long term tax saving plan such as annual contributions to either tax exempt or tax deferred retirement savings vehicles such as Individual Retirement Accounts (IRA's) and life insurance policies with retirement annuities built in.

In the short run, other tax methods that are commonly used are tax deductions in excess of one's qualifying standard deduction. In other words, if a tax filer can itemize deduction on Schedule A that are higher than the standard deduction, it has more tax savings than using the standard deduction. Items that are deductible on IRS Schedule A include mortgage interest paid, paid taxes, job expenses, charitable donations and miscellaneous expenses. (IRS Schedule A

Additional tax deductions that can be taken along with either the standard or itemized tax deductions include exemptions, education credits, child credits, foreign tax credits and savings credits, self-employment tax deduction, tuition deduction and student loan interest paid deduction. ( IRS Form 1040 ) For a complete list of deductions, consult the IRS forms and instructions.

Lower tax by reducing adjusted gross income

The key to saving money on taxes as an individual tax filer is to have the lowest adjusted gross income possible as this is the amount that is used to determine tax. Since deductions and credits lower taxable income, qualifying for deductions that don't cost money but either defer or allow money to grow tax free are ideal. For example, for a regular filing of a 1040 with no other forms required other than W-2's and 1099's, an income below a certain amount does not require tax filing at all, however if tax is due to that tax filer, a tax return should be filed to receive withheld taxes.

All income earned by an American overseas is taxable in the United States if that person is a resident of the United States for more than 6 months of the year. Some persons who don't live in the United States, who are American simply don't live in the U.S. and have all their assets, income and investments in foreign banks, trusts, or tax protected instruments. In some cases this may be legal avoidance of tax due to the U.S. Government, and in other cases it may not. Knowing the difference between legal and illegal tax savings techniques is key to complying with tax laws.

Non-income tax saving techniques 

Since income tax is not the only tax Americans pay, it can be prudent to consider other tax savings techniques as well. For example, tax on everyday items such as food, gas, property, automobiles, retail purchases, utility services such as cellular phones etc. all add a considerable amount of tax payments in excess of both federal and state income tax. Naturally, these types of taxes add up as well so avoiding having to pay them through legal tax saving techniques can also lower tax and increase disposable income.

To lower non-income tax consider making normal purchases via the Internet if the shipping and price together are less than the same item(s) would be had they been purchased retail with tax. Secondly, some states tax more for certain products such as gas and food. If one lives close to a state line consider making purchases for certain products with lower taxes in the other state if the cost of gas does not offset the tax savings.

Automobile and property taxes can also be quite high, in which case the lower the value of both, the less tax will be paid. Evidently then, driving one car instead of three, and driving an economic model of car, perhaps even used will minimize this type of tax paid. Secondly, for property tax on homes, consider living in rural areas rather than urban areas if the cost of tax is greater than the transportation costs to and from any pertinent locations such as places of employment, food stores, garbage dumps, entertainment venues etcs.

Lastly, to save even more on taxes, growing as much of your own food as possible on a rural property with low income tax in addition to driving a used economy model vehicle could save a bundle. Also, consider avoiding highly taxable services such as cell phones because they charge a great deal in additional taxes in comparison to land-lines Being as self sufficient as possible can reduce the need for a number of products and services, and hence taxes.

Summary

There are many ways to save taxes just as there are many types of taxes. Taxes are everywhere and are usually tied to things that are either consumed or income that is received. This is not to say there are ways to reduce these taxes because there are. In some cases only a few adjustments to where one puts money may be needed, but in other cases larger more definitive lifestyle changes may be required. Which ever the tax saving strategy or technique one uses, researching and learning as much information as possible about saving taxes is an important step in becoming aware of how to reduce taxes.

Sources:

1. http://www.irs.gov
2. http://www.irs.gov/formspubs/index.html
3. http://www.irs.gov/pub/irs-pdf/i1040sa.pdf
4. http://www.irs.gov/pub/irs-pdf/f1040.pdf

Using Gas as a Tax Reduction

Gas can be deducted from personal taxable income if it is work, medical, logistic or charity related. Gas used for leisure is not tax deductible according to IRS Revenue Procedure 2008-72. The four categories for which gas costs may be used as a tax reduction are from the IRS 2009 Standard Mileage Rates available at the Internal Revenue Service website, and include the following categories and allocations for the 2009 tax year. These tax deductions are sanctioned in Title 26 of the U.S. Code, specifically sections 213, 217, 162(a), and 170(i). These sections outline specific vehicular use for which tax deductions may apply. 

• Work -55 cents per mile ex: Travel to clients homes during workday
• Charity – 14 cents per mile ex: Travel to volunteer church choir
• Logistics -24 cents per mile ex: Travel to new city for new job
• Medical -24 cents per mile ex: Trips to hospital for medical treatment

Forms needed for gas tax reduction

Properly reporting gas as a tax deduction requires use of the appropriate Internal Revenue Service (IRS) forms. Specific forms that are used to report gas tax reduction include the following list in addition to instructional material provided by the IRS for assistance with completing of the forms. These forms are recorded by the IRS and may be used to calculate a tax refund or reduction in taxes due. Not all these forms may be required; for example if a gas is used as an expense for a sole proprietorship IRS 1040 Schedule C may be used but not IRS Form 1120(S) which is for a different type of business structure.

• IRS Form 1040, Schedule A ‘Itemized deductions’

• Schedule A Instructions

• IRS Schedule C: ‘Profit or Loss from Business”

• Schedule C instructions

• Form 1040 Instructions

• Form 2106 “Employee Business Expenses”

• Publication 526 ‘Charitable contributions’

• Form 1120(S) “U.S. Income Tax Return for an S Corporation”

Key factors and consideration in gas tax reduction

Not all scenarios in which vehicles are used for work purposes are subject to reduction in tax for gas expenses. This is because certain situations may take place in which the funds may be compensated for by the employer or the gas usage does not qualify for tax reduction for other reasons specified by the IRS. Some of factors to consider when determining if gas expenses can be used as a tax reduction are as listed.

• Reimbursed mileage from employers is not tax deductible

• Employers are not required to pay the IRS gas deduction amounts

• Standard mileage rates may be replaced with actual costs

• Excess mileage reimbursement provided by employers is subject to employment tax

• Business vehicle limitations apply ex-number of vehicles

• Gas as tax reduction not applicable if business depreciation is utilized for vehicle

• Only deductions over 2% of AGI qualify for tax reduction as per IRS Publication 529

Summary

Gas can be used as a tax reduction but only in specific instances such as those mentioned in this article. Even within the allowable categories in which gas may be used as a tax reduction, additional IRS regulations may apply that prohibit the use of gas expenses as a tax reduction. An example of such a circumstance is when an employer reimburses an employee for gas independently of a gas tax reduction.

The rates at which the IRS allows reductions for gas expenses is reported by the IRS and is available in this articles’ 2009 Standard Mileage Rates.  For unique tax circumstances and more information regarding gas as a tax reduction consulting a tax professional or  the IRS directly may be necessary. Additionally the links in this article provide source information and originating U.S. Code for applicable uses of gas as a tax reduction.

Sources:

1. http://www.irs.gov (Internal Revenue Service)
2. http://www.us.code.house.gov (U.S. Code)

Claiming medical bills on taxes

Medical costs can be claimed as adjustments and/or deductions to one's taxable income. That is to say, there are two opportunities tax filers have to lower their taxes and consequently, lower their annual medical costs through tax savings.

Those two ways include tax deductions for  medical expenses within the itemized section of a tax return, i.e. Form 1040, schedule A or as an adjustment through a health savings plan on the adjustments section of form 1040. This article will illustrate how these reductions to taxable income occur and provide tips on using medical expenses in tax filings.

Deducting medical expenses on Form 1040 Schedule A

Medical and dental bills can be claimed on form 1040, Schedule A if the cost of the expenses are in excess of 7.5% of the tax filings adjusted gross income. For example, if the adjusted gross income after adjustments is $38,000.00, medical expenses in excess of $2850.00 are deductible on a schedule A. A household would have to have significant annual medical expenses to benefit from this percentage deduction.

For people with high annual medical expenses, this deduction favors can be beneficial to tax filers with high medical bills and/or income tax brackets. For example, a tax filer who is in the 25% tax bracket can save approximately $250.00 in taxes per $1000 of income in over $30,650 if medical expenses over 7.5% of adjusted gross income. On income levels below the 25% tax bracket, deduction to income as a result of medical expenses will save 10%-15% in tax or lower depending on the income amount.

The range of medical expenses that are deductible on an IRS form 1040, Schedule A is outlined in the IRS instructions of the Schedule A. The allowable medical expenses are quite broad and include but are not limited to, the following expenses, as outlined by the IRS schedule A instruction booklet.

• Supplemental Medicare costs and Medicare pare D premiums
• Medical and Dental Health Insurance premiums
• Self employment health insurance premiums
• Medical examinations
• Hospital care
• Surgery
• Ambulance services
• Medical equipment

Adjusting income through health savings plans

Contributions to health savings plans can also lower taxes because those contributions may lower adjusted gross income. In other words, medical expenses that take the form of contributions to health savings plans may be beneficial to a tax payer as a way of hedging insurance fees with tax savings. To adjust for income contributed to a health savings plan, a form 8889 is required. Instructions and eligibility requirements for a health savings plan adjustment are available through the Internal Revenue Service website.

According to the Internal Revenue Service form 8889 instructions, the contribution limit for a health savings plan's of persons under 55 years of age is currently $2,850.00 for individuals and $5,650.00 for families and the contributions must be made to a "high deductible health plan" or HDHP. The potential savings one can achieve through a Health savings plan adjustment are $427.5 at a flat tax rate of 15% for individuals, and $847.50 for families. The advantages of such adjustable medical expenses may be beneficial in lowering overall medical costs through a tax hedge.

Health coverage tax credits

Health coverage tax credits are available to qualifying individuals and families. Generally, this tax credit is only available to a specific demographic as proscribed the Internal Revenue Service and the potentially eligible groups include 1) persons over 55 and receive pension form the Pension Benefit Guaranty Corporation, 2) the tax filers state of residence provides supplemental income and considers the tax filer to be part of a trade readjustment program and 3) the tax filer is 50 years old or higher and participates in an alternative trade adjustment assistance program.

The above tax credits are specific to age groups and those affected by job losses caused by free trade outsourcing. Participating in such programs is a factor, but not necessarily a sole determinant of eligibility for the health coverage tax credit. The Internal Revenue Service has specific links for the health care tax credit program, one of which is cited at the bottom of this article.

Tips to consider for deducting medical expenses

When making use of medical expenses to lower taxable income there are several techniques that may prove helpful in maximizing the benefits and making full use of the allowable tax deductions. A few tips tax filers may wish to consider when making use of medical expenses are the following:

• Consider Switching Health Plans: A High Deductible Health Plan takes a percentage of monthly premiums and contributes that amount to the Health Savings Account. That balance is used for medical bills and is tax deductible.

• Ask for Co-pay, and deductible receipts: Doctor co-pays and deductible can add up over the course of a year. Keeping track of every co-payment and deductible will help ensure the maximum deduction is made on the tax filing.

• Weigh the benefits: It may be more advantageous to use a different health plan than a high deductible health savings plan. To figure out which plan is better 1) subtract the tax savings from HDHP from annual medical costs using the HDHP, then 2) compare that amount to the premium and annual medical expenses minus any potential tax savings using another health insurance plan.

• Research: Understand how preventative medicine can sometimes lower costs across the board and study which insurance plans are best and have the lowest co-pays and deductibles for the lowest costs. The more cost effective solution will either cost less in terms of annual expenses or yield greater tax savings than the savings achieved through the most cost effective health savings plan.

• Consult: Contacting the IRS at 1-866-829-1040 may be of assistance when one has questions regarding allowable expenses and how those expenses should be adjusted for, deducted or credited. If the information provided by the IRS is not sufficient a tax preparation service may be of use, but of additional cost.

Summary

Tax deductions exist because the creators of tax code determined certain living expenses should not over burden consumers. One such tax "break" is medical expense deductions in excess of 7.5% of one's adjusted gross income and tax adjustments from contributions to a high deductible health savings plan.

In some instances, tax filers participating in specific pension plans administered by the pension benefit guaranty corporation and/or participating in trade readjustment program may qualify for a tax credit.

Benefiting from the tax benefits of medical expenses involves a little analysis of the pros and cons of medical treatments, various health insurance programs, and courses of action pertaining to one's or one's family's health.

Studying the options and the potential tax benefits and weighing those tax benefits against more cost effective insurance plans and health programs can be helpful in achieving the most optimal financial benefit.

The tips in this article provide some guidance but should not be considered more than that as tax filer's health and tax situations tend to be different. However, being aware of the tax benefits and information provided herein, can potentially yield tax savings.

Sources:

1. http://www.irs.gov/pub/irs-pdf/i1040sa.pdf
2. http://www.irs.gov/pub/irs-pdf/i8889.pdf
3. http://www.opm.gov/hsa/HSA_NetAmounts.pdf
4. http://www.irs.gov/individuals/article/0,id=109945,00.html

Taxation of Capital Losses

Capital losses are the adverse circumstance that most investors don't like i.e. a loss of capital arising out of the sale of an asset that has lost value. Examples of capital losses include the sale of a home at a lower price than one bought it for, and loss on the sale of stocks. As bad as capital losses are there is actually a good side to capital losses and that has to do with their taxation.

Capital losses are tax deductible

The best thing about a capital losses are they can be included among allowable tax deductions. When one loses money through the sale of an asset that has lost money that loss can be deducted of a tax filers annual income. For example, if John Doe earned $51,000.00 in year Y, but also lost $5,000.00 on the sale of his home, he can deduct the $3,000.00 from the $66K making his annual income $48,000.00

Another good thing about the tax deductibility of capital losses is that they may lower one's adjusted gross income to an income tax bracket they would not have been in had they had a capital gain or no capital loss. When one is close to the cusp of tax brackets, capital gains between $1-3000.00 may be redundant since a capital loss of the same amount could save one a similar amount of money in taxes. That is to, say when in the tax cusp sell at a loss to avoid higher taxes.

Illustrating cusp taxation

To illustrate how selling at a loss can be good consider the following example. Since John Doe earned $51,000.00 in year Y, it is looking like he may end up in the 25% tax bracket after deductions. Moreover, without the capital loss, John Doe may only be able to utilize his standard deductions and federal tax exemptions, which can be around $17,000.00 if John Doe has no children and is married filing jointly.

This makes is adjustable gross income $36,000 which doesn't qualify for the 15% income tax. However, with the capital loss deduction of $3,000.00, John Doe's income is now only taxable at 15% which is approximately $4650.00 of tax as opposed to $9000.00 at the $36K level. So even if John Doe had a capital gain of $3K or no gain at all, being in the lower tax bracket has saved him around $5000 in taxes which is better than $3000 in capital gains or no gain at all.

The value of capital loss

Tax filing status can have a direct impact on the maximum tax deductibility of capital losses. For example, the capital loss deduction is higher for married persons filing jointly than for singles i.e. in 2007 the maximum deduction was $3,000 versus $15,00.00 so any loss greater than these amounts is a worse loss.

Additionally, capital loss is not always a losing scenario. If one's capital loss is only $2000.00 but one is still in a higher tax range or not in the cusp, that person still saves in taxes a percentage of the amount one would have had in income had the capital loss not occurred. In other words, $250.00 in taxes if one is in the 25% range with a deduction of $2000,00 or $280.00 if in the 28% tax bracket. Thus, the tax system actually lowers the monetary value of the loss by 12.5-14%

Should Volunteer Time be Tax Deductible?

Volunteer time that is tax deductible is intrinsically able to provide incentive for individuals to volunteer in addition to assisting potential increases in GDP, mental and physical health, and improve cultural and socio-economic factors important to a nation, economy and culture. In other words, tax-deductible volunteerism in the form of time spent volunteering or working as a volunteer, could facilitate a significant positive influence financially and nationally.

There are several variables to consider when weighing the benefits and disadvantages of tax deductions associated with volunteer work. Specifically, what are the costs to the government if any, how volunteer work increases GDP, why it can improve health and what benefits to culture and socio-economic standing it can have. The remainder of this article illustrates these issues and factors to demonstrate shy tax deductions to volunteer time are a good idea.

• Increases to Gross Domestic Product

Gross domestic product is the total value of all goods and services generated by a nation for a specific year. In the United States the GDP for 2009 was $14.26 Trillion according to the World Bank. An increase in volunteer work especially among the retiring baby boomer population could keep the workforce healthy and strong albeit through a transformed mechanism. It would be a waste to throw away the willingness, knowledge and ability of an experienced generation.

• Indirect boost to government revenue

A tax deduction for volunteer time would not cost the Government money because the volunteer time itself would increase Gross Domestic Product (GDP) and indirectly lower other government expenses to a greater degree than the tax deductions cost. Additionally, according to the New York State Office for the Aging, volunteer work can potentially increase government revenue.

To illustrate the above point, if GDP increases, so does the potential exports of products and services provided that the volunteer time and/or work has either a direct or indirect impact on those sectors of the economy impacting exports. The profit on those exports is taxed, so the Government would merely be shifting the tax but assisting greater wealth nationwide through improved exports. Furthermore, exports are just one area of the economy through which Government tax revenue can be obtained.

• Improvements to Mental Health

Work involving physical exercise and positive human interaction can be strongly linked to improvements in both mental and physical health on condition the work is performed within reason. That is to say, if some of the more negative consequences associated with working such as stress, don't outweigh the benefits then time spent volunteering can be beneficial to the health of a nation. . Countless studies have linked physical exercise to improved health and the more mentally and physically healthy a nation is, the less government subsidized health care costs will be thereby lowering government expenses further.

• Increases in volunteer work

The principles of capitalism mandate financial incentive yields productivity when such motive is linked to profit motives. Since retirees may have more time to volunteer and might want to maximize their retirement standard of living, such a program would also benefit this increasingly long lived portion of populations. Moreover, if there is a high deduction cap to volunteer work or none at all, this essentially makes the potential tax savings optimal. Not only does can potential tax savings assist in mobilizing a retiring and/or motivated workforce, it can also increase volunteer work statistically. Since volunteer work is known to be a good and positive thing, increases in volunteer work would also be good.

• Decline in poverty

Tax deductible volunteer time or work can also help reduce poverty, welfare programs and re-invigorate stagnant demographics of the economy to be more productive, happier and healthier. Volunteer work can do this if volunteer efforts are aimed at helping marginalized groups of people live better lives through programs such as habitat for humanity, concern America and the community service society.

In summary, all the aforementioned potential benefits of tax deductions for volunteer work comprise a net cultural enhancement in which several social, economic and medical aspects of a given demographic can benefit. In essence, tax deductible volunteer time has the potential to be a positive catalyst not just on the individual level, but also on the cultural and national levels.

Provided the incentive of tax deductibility is affective, many positive financial, and social changes can occur as a result. Should such results not occur, through low volunteerism despite a tax deduction, the government loses nothing because what isn't deducted, is paid in taxes. Consequently, a tax-deductible volunteer program really is worth considering in light of any one of the above variables.

Charitable Donations That Can Be Claimed On Income Taxes

Charitable contributions can and do lower taxable income if deducted correctly. The Department of the Treasury, Internal Revenue Service has been legislated through Title 26, section 170 of the IRS code to allow for specific charitable contributions to be tax deductible. This article will discuss the types of tax deductions that are possible through charitable donations in addition to required tax forms, approved recipients of charity, and a key points in the federal tax code as they pertain to tax deductibility of charitable donations.

Tax deductible donations and programs

It is important to note receipts and records can verify both the accuracy and price of donations. Receipts indicating the name of the organization donated to are required for donations higher than $250.00. Furthermore, for certain property, appraisals and estimates of fair market value must be submitted to the Internal Revenue Service to validate the claimed deductible amount. A few of the listed tax deductible items allowed by the U.S. Internal Revenue Service are the following:

• Books, Art and Jewelry: May be subject to an appraisal requirement.
• Clothing: Must be in condition or better to qualify for deduction.
• Stocks and Inventory: Recorded at "Fair Market Value" or lower.
• Money: Detailed records must be kept, a form 8283 is not required for cash donations.
• Vehicles: Personal or private use vehicles including boats and planes.
• Real estate: Cannot be deductible beyond market value i.e. inflated cost.

There are more ways to receive charitable tax deduction that giving way used property or cash. That is to say, in addition to more typical donations are a few less known charitable programs and laws that make possible more creative ways to save money on taxes. Three of these programs and/or applicable donations are illustrated below:

Charitable leave donation program

This program allows working individuals to deduct paid time off from employment if the funds that otherwise would have been paid to the employee are donated to a "tax-exempt organization that provides relief for victims of hurricane Katrina." (www.irs.gov). Depending on how much time one contributes this could range from tens of dollars to thousands of dollars and is consequently a significant income tax reduction opportunity.

Organ donation and recovery improvement act

A federal law enacted in 2004 that allows states to legislate tax deductibility of expenses related to organ donation tax deductible. Several states have allowed for up to $10,000.00 to be tax deductible in relation to travel, accommodation and time away from work. In some cases the deductions are reserved for State employees.

"Qualified Conservation Contributions" (Form 8283 Instructions): Property related donations that are made specifically for purposes of conservation qualify as "conservation contributions" 1) must be made to organizations capable of carrying out the conservation effort, 2) can only be recorded at fair market value or lower and 3 )must be to a qualifying organization.

Tax forms

As with other aspects of tax filing, charitable contributions hold no exception and require documentation. The following forms are not all required but do provide additional information that may be helpful in researching and understanding the dynamics, and IRS guidelines regarding charitable donations in greater detail.

• IRS Form 8283: Non-cash charitable contributions form for donations over $500.00
• Form 1040: Schedule A, Lines 16-19: Itemized (charitable) deductions
• Receipts, and records indicating organizations, value and date
• IRS Publication 526 "Charitable contributions"
• IRS Publication 557: "Tax Exempt status for your organization"

IRS approved organizations

Generally, tax deductibility of charitable contributions must be made to specific types of organizations, foundations, government entities or businesses. In most cases these organizations are not operated for profit and/or consist of religious foundations, social services, and public investment. A list of organizations that may qualify for charitable contributions include the following:

• Churches or "a convention or association of churches" (Title 26, Section 170)
• Medical facilities that do not operate for profit.
• Tax exempt organizations classified as 501(3)(c) i.e. not for profit.
• Social and public development government affiliated entities
• Private Foundations that operate as non-profit organizations.

Federal tax code highlights: Title 26, Section 170

The federal tax code illustrates in legalese, the types of allowable charity, organizations to which organizations can be made, amounts of contributions that can be made in addition to valuation criteria and special rules applying to the conduct of charitable donations. These rules and regulations include business and corporate definition of charitable contributions and the rules applying to such. A few main points made within the tax code are subsequently provided and detailed:

• Tax year: The time period in which donations must be made to be eligible for tax deductibility is within the tax year for which taxes forms are being filed.

• Future property donations: Cannot be deducted until exchange of property has taken place.

• Capital gains contributions: Limitations to capital gains donated should amount to no more than 30% of total charitable donations.

• Maximum Charitable Contribution: Contributions in excess of "contribution base" i.e.. more than the allowable amount can be carried over and applied in subsequent tax years.

Charitable contribution recapitulation

To recap, charitable contributions are a means by which taxable income can be reduced. In order to qualify as tax deductible, certain pre-requisites and IRS mandated rules must be followed. Specifically, donations should be accounted for properly, be made to "eligible" recipients, and comply with federally legislation i.e. Title 26, Section 170 of the Department of the Treasury tax code.

When in doubt about the recording of, qualification of or procedure for filing charitable donations with the IRS, specifically trained IRS representatives may be available during business hours to answer questions at 1-866-829-1040. In other cases, tax preparation professionals or accountants may provide additional knowledge and instruction into the process.

If a tax filer has a high enough dollar amount in itemized deductions, the advantages of charitable contributions can be realized by 1) potentially lowering a tax filers tax bracket, 2) in the carrying over of tax returns to a subsequent year, 3) exceeding the standard deduction amount for the tax filers tax filing status and 3) in realizing a lower if not a zero tax amount or tax return.

Sources:

1. http://www.law.cornell.edu/uscode/26/170(c)..html
2. http://www.irs.gov/charities/charitable/article/0,id=149949,00.html
3. http://www.ehow.com/how_13124_save-money-taxes.html
4. http://www.irs.gov/pub/irs-pdf/i8283.pdf
5. http://www.ehow.com/how_13124_save-money-taxes.html

Income tax: Using the itemized deduction vs standard deduction

Deductions are one of the principal methods of avoiding undue taxation by the U.S. Internal Revenue Service (IRS). As unpleasant as tax filing season may be, it is important to know the benefits and distinctions of each type of tax deduction in detail so as to correctly file taxes and report accurate taxable income. When filing taxes only one or the other of the standard deduction or itemized deductions can be used. Consequently, knowing which tax deductions will yield the more precise taxable income can be worth the time spent deciding which methods is best.

The standard deduction

The standard deduction is a pre-set value appearing on the IRS form 1040 that varies on one's filing status. The filing status includes one's marital and household standing in addition to spousal filing information. The three filing statuses used by the U.S. Internal Revenue Service and corresponding standard deductions are as follows:

• Married Filing Jointly: $10,700.00
• Head of Household: $7,850.00
• Single or Married Filing Separately: $5,350.00

It pays to be married and file a joint tax return if the standard deduction for such filing is higher than itemized deductions, and if filing jointly does not adversely affect one's tax bracket and taxable income to the point of negative benefits. In other words, if the cost of filing as jointly married outweigh the benefits it may be better to file as married filing separately or head of household.

Head of household filing status requires a familial and dependent relationship who both lives with the tax filer and who pays less than half the annual living expenses for the household. More detailed qualification details for this filing status and deduction can be found on pages 13-17 of the form 1040 filing instructions.

The single or married filing separately filing status has the lowest standard deduction and the least impact on taxable income of the three options. This standard deduction is more likely to be compared with the itemized deductions in terms of total deduction to adjusted gross income because it is the smallest. That is to say, the itemized deductions have the greater chance of being larger than the single or married filing separately standard deduction.

The itemized deduction(s)

Itemized deductions are voluntary individual deductions that can be used instead of the standard deduction. Itemized deductions can be filed using a Form 1040 Schedule A-Itemized deductions. Some of the more significant deductions are listed as follows:

• Medical and Dental Expenses over 7.5% of one's adjusted gross income
• State and local income taxes paid or sales tax ex.7.25% in California, 2.5% in Colorado
• Residential Mortgage interest expense
• Charitable donations ex: clothing, cash, equipment
• Employee expenses not paid for by an employer ex: International Travel

If the total itemized deductions are greater than the applicable standard deduction, the itemized deductions will contribute to lower taxable income. Mortgage interest expenses and income tax may yield a significantly large enough deduction to justify using the itemized deductions.

To illustrate the above point, a home with 200 thousand dollar mortgage at 6 percent charges approximately $12,000.00 in mortgage interest expense in its first year not including reverse compounding. This mortgage interest expense alone is higher than the highest standard deduction. Generally, the higher the standard of living a household maintains in terms of income and mortgage taxes and expenses, the more likely it is itemized deductions will be the correct tax filing deduction choice.

Itemized vs standard deduction filing tips

The following tips can help one determine which type of deduction is more likely to yield a lower taxable income. In cases of lower income and standard of living, the standard deduction is more likely to be the correct choice. However, in some cases both ways may come close in terms of dollar amounts of the deductions while in cases of high mortgage interest and taxable income, the itemized may be the better choice.

• Taxable income: Taxable income is the final amount tax will be assessed on. Making this number as low as possible and understanding that it can be reduced via deductions is key to reducing income tax.

• Filing status: Filing status may benefit taxable income if the joint income is lower than the additional deduction. Ex-If one spouse is not working, the additional deduction amount will yield a significantly lower taxable income.

•Audits: Sometimes deductions may trigger IRS audits. Whether the deductions are for business expenses, charitable donations or another purpose, ask for and keep receipts is essential in proving the legitimacy of the deduction in case of audit.

• Sales vs Income tax deductions: Comparing sales tax deductions with income tax deductions using pages A-4, A-11 and A-12 of the form 1040 Schedule A instructions can help identify the higher deductible if any. Sometimes calculations will be necessary to determine which deduction yields the greatest income advantage.

• Charitable contributions: Charitable contributions aren't necessarily beneficial if the donation amount does not lead to a greater amount of saved income tax. Calculating charitable contributions with the potential aim of lowering tax bracket ex. 28 to 25 percent, or 25 to 15 percent is one way to optimize charitable contributions tax deductions.

• Schedule A: Complete a Schedule A even if the standard deduction is believed to be the better choice. This will enable a more accurate comparison than a rough estimate of total itemized deductions.

Taxes can be thought of as the necessary evil that lubricates and maintains the regulatory machinery that keeps a country safe, functional and operational. Nevertheless, not many people if any want to over pay the government during tax filing season. For this reason it can be a good idea to determine which tax deductions are the most exact representation of deductions to one's taxable income.

Source: http://www.irs.gov