 Yikes! This year’s deadline for filing your 2011 federal return is fast approaching. Although the Internal Revenue Service (IRS) has extended the filing date this year to April 17, a few extra days won’t matter much to the millions of us who usually wait until the last minute to prepare our tax returns.
If that describes you, chances are you think it’s too late to reduce your tax bill. But here’s good news. You may be able to still lower the amount of any federal 2011 taxes you owe by looking into these strategies.
Take another look at your individual retirement account (IRA).  Contributions to a traditional IRA s may be tax deductible if your income is below set levels – and you can add funds to your IRA right up until the filing deadline of April 17, 2012. The maximum contribution is $5,000, unless you were 50 or older by the end of 2011 (then you can contribute $6,000). Certain other restrictions may apply so make sure and consult a tax advisor to find out what’s best for your personal tax situation.
Did you refinance your mortgage in 2011? While real estate values have plummeted in many parts of the country, interest rates on home mortgages have also dropped. So many people have refinanced mortgages to make home payments more affordable. If you refinanced in 2011, you may prorate any points you paid over the length of the new mortgage for a tax benefit. For instance, if you paid your mortgage lender $3,000 in points for a 15-year refinanced mortgage at the beginning of 2011, you can deduct $200 a year on your taxes over the course of 15 years.
Consider adding to a tax-deductible health savings account (HSA). Health savings accounts (HSA) are similar to personal savings accounts. The money you deposit in them is not taxed (and you can add funds for 2011 right up until tax filing time this year.) However, your HSA can only be used for health care expenses. You can use the account for your own medical expenses or for those of any tax dependents (such as your spouse and children), even if they're not on your insurance plan. To be eligible to open an HSA, you must have a high-deductible health insurance plan, sometimes called “catastrophic coverage”.
The IRS decides how much you can contribute (limits are indexed for inflation and adjusted annually). In recent years limits have been around $ 6,000 for a family and $3,000 for individuals. It’s good to know unspent money in your HSA can be rolled over each year. The IRS has specific rules on what medical expenses qualify for an HSA tax break. Beginning January 1 of last year, some over-the-counter health products (such as pain relievers and supplements) can only be paid for out of an HSA account if you have a written prescription from your doctor; other products including bandages and other medical supplies are still HAS-qualifying. The IRS provides updated information about HSAs online: http://www.irs.gov/pub/irs-pdf/p969.pdf.
Don’t itemize? Maybe it’s time to rethink that (and save a bundle on your taxes).
It’s easier to take the standard deduction and forget about gathering all those receipts and cancelled checks together in order to itemize. But it could well be worth the bother when you consider you could save quite a bit on what you owe the federal government, or what you get back in the form of a tax refund.
The key is coming up with qualified expenses that add up to more than the 2011 standard deduction of $5,800 for singles and $11,600 for married couples who file jointly. Unfortunately, it’s easy to overlook legitimate, miscellaneous expenses which may not seem like much individually. However, if you take the time to combine the amount of these deductions, they may easily add up to more than two percent of your adjusted gross income – giving you a higher-than-standard-deduction tax break.
Consider these often over-looked deductions:- Tax-preparation fees
- Job-hunting expenses
- Car expenses directly related to work (for which you are not reimbursed by your employer)
- Professional dues
- Medical and dental expenses (check out the downloadable IRS guide for an explanation of which are tax deductible; the guide also explains how to treat insurance reimbursements: http://www.irs.gov/pub/irs-pdf/p502.pdf)
- Charitable donations: remember that money donations are not the only thing deductible; clothing and household items donated by 12/31/2011 are deductible, too (so always get receipts non-profit organizations)
Get the facts on home office deductions. You may have heard that claiming a home office is a red flag for the IRS and ups your risk of an audit. However, the rules for claiming a home office deduction have loosened somewhat. What’s more, the IRS spells out specifically how and why you can claim a deduction for a home office. So do your homework and, if you qualify, take that home office deduction for a possibly hefty tax savings.
Remember that you cannot deduct business expenses for any part of your home that you use for both personal and business purposes. If you have a home office that you use for your job on days you telecommute or work from home, or if you run a separate business (for example, selling items on Ebay) and use a room specifically for that reason, you could likely claim a home office deduction. An employee may only deduct business-use-of-the-home expenses (including utilities, a portion of the mortgage, insurance, maintenance and more) when the home office is used regularly and exclusively and for the employer's convenience.
Check out the IRS guide to home office deductions for specific information: http://www.irs.gov/businesses/small/article/0,,id=204169,00.html
More tax time tips.Consider the information in this article as suggestions – consult a tax advisor before implementing any of these ideas to make sure they are appropriate and accurate for you and your income and tax bracket.
- The IRS has forms, advice, and a help line to make tax time less stressful and to answer your questions: http://www.irs.gov/individuals/index.html
- If you are unable to file your federal income taxes by the April 17 deadline, you have until mid-October to file your 2011 returns.
However, you must pay any taxes you estimate that you owe by the April 17 deadline, or you will face extra penalties and interest. You’ll find IRS information on applying for an automatic tax return extension here: http://www.irs.gov/taxtopics/tc304.html.
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