One tax guide used by tax accountants has 66,498 pages! This tax tips guide will make it simple for you.
1. Changes in your marital status-- If your marital status changed last year, choose your filing status carefully; it can be more complicated than you imagine. For the newly married, joint filing usually will be most advantageous, but separate filing may be best under some circumstances, such as very high medical bills for one of you. The newly widowed generally can file jointly for the year in which a spouse died as long as the have not remarried. Widows and widowers are eligible for special filing status the following two years if they have dependent children. The divorced can file as single or as head of household if they have qualifying dependents.
2. To Itemize or not to Itemize-- The standard deduction is the way to go for most people who don't have a mortgage or who have one that is nearly paid off. That is especially true for those 65 and older, who get an extra standard deduction of $1,250 if single or $1,000 per person if married. However, if you have very large medical expenses or charitable donations, it is worthwhile to run the numbers to see if itemizing would pay off. If you itemize, be sure to run down the list of potential deductions each year to make sure you aren't missing anything. One you won't want to leave out this year is sales tax deduction. Look in the instructions for FORM 1040 to find the sales tax table and worksheet. Sales tax from vehicle, boat, and any big item purchases can be added to the amount calculated.
3. Self-employed deductions-- Pay special attention to changes in the tax rules if you are self-employed or deduct employee business expenses. This year be sure to to note that there are two rates for business mileage deductions, depending on whether the miles were driven before or after Sept.1. The IRS changed the rates to compensate for higher gasoline prices.
4. Keep records on investments-- Investment records are essential. If you sold stocks, mutual funds or other investments, you'll need to go back through your records to determine what you paid including any reinvested dividends. You must make a good faith effort to establish your cost basis or pay taxes on the full proceeds of the sale. If you own a stock that has been through splits and spinoffs, your basis has to be allocated across all the shares. Sometimes a company's Web site will have information you need on splits and spinoffs.
5. If you sold your home in 2005-- Your age and what you do with the proceeds no longer make any difference when you sell your house. If you sold your principal residence last year and you owned and lived in the property at least two of the past five years, you will not owe any tax on profits of up to $250,000 (single) or $500,000 (married).
6. What about grown children?-- Are your grown kids still living with you? If you provide more than half their support, full-time college students can be claimed as dependents as long as they are under age 24. If they don't meet that test, you can claim children over 18 only if their gross income is less than $3,200 (not including untaxed government benefits).
7. No benefits for cohabitation-- There are no tax breaks for unmarried honeys. Live-in boyfriends or girlfriends cannot be claimed as dependents even if you support them. You also don't get any tax benefits by supporting your partner's children from a prior relationship. Of course, if you marry, the tax picture changes.
8. Social Security may be taxed-- Social Security benefits may be taxable. If you're a new beneficiary, you may not have uncovered this unpleasant fact. Part of your benefits may be taxed if your "provisional" income, including half your Social Security benefits and some tax-exempt income, is greater than $25,000 (single) or $32,000 (married). Even if your usual income isn't that high, selling an investment and realizing a capital gain may put you over the threshold.
9. If you are elderly or disabled-- The Tax Credit of the Elderly and Disabled sounds better than it is. You don't qualify if your adjusted gross income is $17,500 or more (single) or $25,000 on a joint return with both spouses eligible. In addition, your untaxed Social Security benefits cannot be more than $5,000 (single) or $7,500 (married). The credit is not refundable, so you can't get more than what you owe in taxes.
10. Car donation charity changes-- Donating a car to charity isn't the great deal it used to be. In most instances, you can deduct only what the car brings when the charity sells it at auction. In previous years, you could deduct fair market value.
11. Your IRA contributions-- The amount you're allowed to set aside in tax-sheltered retirement accounts continues to grow each year. You have until April 17 to make a 2005 IRA contribution of $4,500 ($4,000 if you are under 50). For 2006, the limit is $5,000 ($4,000 if you are under 50). Either you or your spouse must have earned income to contribute to an IRA. The contribution limit for most employer-sponsored retirement savings plans this year is $20,000 ($15,000 if you are under 50).
12. Some new energy credits-- New energy credits for homeowners apply to items installed in 2006 and 2007, including solar water heaters (but not heaters for pools or hot tubs), insulation, doors, windows, skylights, gas heaters and electric heat pumps, all of which must meet energy efficiency standards. The maximum credit is $500 over two years.
13. Hurricane Relief Charitable Contributions-- If you made a large cash charitable contribution between Aug.28 and Dec. 31, you may benefit from one of the Hurricane Katrina tax breaks. Even if the charity had nothing to do with Katrina, deduction limits that normally apply to charitable contribution were lifted for donations made during that period. Those who lived in area affected by hurricanes Katrina, Rita, or Wilma should call IRS hurricane toll free info line at 1-866-562-5227.
