TaxHawk.com's Tax Tips

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Tip #51
Real Estate Professional
You are not limited to $25,000 in yearly rental losses on your tax return if you are a real estate professional. If you spend more than one half of any job or business related time doing your real estate business and spend more than 750 hours on your real estate business, then you are a real estate professional. EXAMPLE: You own 10 rental houses for which you personally spend 1,350 hours during the year doing work related to those homes. You are also a school teacher and spend 1,300 hours during the year in the class room. Since more than half of your professional time is spent on your real estate business and you meet the 750 hours test, you are a real estate professional.

Tip #52
Closing Costs
Most settlement fees and closing costs when you buy a house are not deductible, they are added to the cost basis of your home. However, real estate taxes and mortgage points found on your settlement statement are usually deductible on Schedule A. Mortgage interest shown on the settlement statement is usually already included in the Form 1098 you receive from your mortgage lender.

Tip #53
Timing of Income
Analyze the timing of any income that you have control over such as pension distributions or stock sales. Many tax credits and deductions are limited once your adjusted gross income (AGI) reaches a high enough level, so you want to look at what your AGI will be if you receive the pension distribution or capital gain. For example, if you have a child in college and you are eligible to take a HOPE tax credit for that child's college tuition, then you would want to look at the effect of including any extra income on the HOPE tax credit. If your income exceeds the HOPE income threshold then you wouldn't receive the HOPE credit.

Tip #54
Timing of IRA Contributions
Roth and traditional IRA contributions can be made after the tax year ends. You have until April 15th of the next year to make an IRA contribution, so a good way to reduce your tax liability after the fact is to make a deductible traditional IRA contribution before you file your tax return.

Tip #55
Clothing Donation
Used clothing donated to a qualified charity can be taken as a noncash charitable contribution on Schedule A. The amount of the deduction is the value of the clothing if it would have been sold at a used-clothing store. If the value of your noncash charitable contributions exceeds $500 then you need to fill out Form 8283.

Tip #56
IRS Notice
If you receive a notice from the IRS, don't assume that it is correct and automatically pay the amount shown on the notice. Many IRS notices just require you to give the IRS additional information to show why you do not owe the additional taxes or penalties. If you agree with the changes the IRS made and owe the IRS additional tax, interest and penalties, you would pay the additional tax and interest and mail it to the address shown on the IRS notice, but you may want to try not paying the penalties. The IRS often waives penalties if asked. Write a short letter explaining how the mistake was made and requesting an abatement of the penalties. Include the letter with the payment you mail to the IRS.

Tip #57
Vandalized Rental Property
If your rental property is damaged by vandalism, the repair costs to restore the property to its previous condition are deductible as repair and maintenance costs instead of being capitalized and depreciated.

Tip #58
Clothing & Uniforms
Clothing required for your job that cannot also be used for general wear is deductible as a miscellaneous itemized deduction. Laundry and cleaning expenses for qualified clothing are also deductible. Examples of deductible work clothing and uniforms are safety shoes, safety glasses, nurse's uniform, and a bus driver's uniform. Any clothing that is suitable for use off of the job, such as blue jeans, is not deductible even if you only use the jeans for work. Any qualified clothing that you use while volunteering for a charitable organization (like a boy scout uniform) is deductible as a charitable contribution. The clothing cannot be suitable for use other than for the volunteer activity.

Tip #59
Nontaxable Scholarships
Most scholarships and fellowships are not taxable income. Scholarships or fellowships are usually only taxable if they are received for services rendered such as for doing research or teaching, or if you receive amounts for room and board. Any amount received for tuition or books is not taxable.

Tip #60
Rental Home Depreciation
Always take depreciation on your rental home. Some people don't want to bother taking depreciation on their home if they are planning to rent their home for a year or two before returning and making the home their principal residence again. However, the IRS considers depreciation to be taken on your rental home for the period it was rented whether or not you take the depreciation on your tax return. So when you eventually sell the home, gain needs to be recognized to the extent of any depreciation taken (or what should have been taken).

Tip #61
Child's Social Security Benefits
If your child receives Social Security Benefits, the benefits are reported on your child's tax return and not your tax return. Social Security Benefits will almost always not be taxable to a child since a child's income is usually not high enough. Most children don't even have to file a tax return unless the child has W-2 wages or enough investment income to create a filing requirement. So if the only income your child has is Social Security Benefits, you do not need to file a tax return for your child.

Tip #62
Extension Payment
If you owe money to the IRS on April 15th, you need to pay the money owed even if you get an extension to file your tax return. The extension, Form 4868, does not give you extra time to pay your taxes owed. You can make a payment with the extension. Even if you don't have the money owed to the IRS, you should definitely file the extension in order to avoid the 5% a month late filing penalty. The late payment penalties are a lot less than the late filing penalty.

Tip #63
Bunching Itemized Deductions
If your Itemized Deductions and Standard Deduction are about the same or if you don't have enough deductions to use the Itemized Deductions, you might want to bunch your itemized deductions in one year such as paying January's mortgage payment one month early in December, paying two year's worth of charitable contributions in one year, and paying January's state estimated tax payment in December. By bunching itemized deductions in one year, you will maximize your itemized deductions in the current year, then be able to use the standard deduction the following year.

Tip #64
Job Expenses
Unreimbursed employee business expenses can be deducted on Schedule A as miscellaneous itemized deductions subject to the 2% floor. You will need to fill out Form 2106 or 2106-EZ. Examples of employee expenses are union dues, professional dues, tools, computer, safety shoes, safety glasses and other protective clothing, uniforms, transportation (other than commuting), business cards, licenses, trade magazines and subscriptions, meals and entertainment (50% is nondeductible), briefcase, office decorations, office supplies, expenses related to temporary out-of-town job assignments, business travel, certain education expenses, certain job search expenses, malpractice insurance, home office expense, and any other expense that relates to your job. If your employer reimburses you under a nonaccountable plan, the reimbursement is included as income on your W-2 and you will deduct your job expenses on Form 2106 or 2106-EZ. If your employer reimburses your expenses under an accountable plan, you don't need to report any expenses on your tax return since the reimbursement is excluded from your W-2 wages.

Tip #65
Tax Records Storage
Keep your tax records for at least four years from the date your tax return was filed. The statute of limitations expires after three years from the time you filed your return (based on the filing deadline such as April 15th), or two years from the date the tax was paid, whichever is later. If you have depreciable property or stocks, you should keep a copy of your property and stock records indefinitely so that you have a way to calculate the cost basis when the properties or stocks are sold.

Tip #66
Job Hunting Expenses
Job hunting expenses are deductible as a miscellaneous itemized deduction on Schedule A if you are looking for a job in your present type of work. You can't take a deduction if you are looking for your first job, changing to a job in a new line of work, or if you have been unemployed for a long period of time. Deductible expenses include resume costs, employment agency fees, automobile expense, travel expenses, long-distance phone calls, 50% of related meals and entertainment, and any other job hunting expenses.

Tip #67
Change of Address
If you are filing your tax return and have moved since the previous year, just put down your new address on your tax return. If you move after you have filed your tax return and before you have received your refund, fill out a change of address form at your old post office or go to www.usps.com and fill out a postal change of address online. If you have moved in the middle of the year and want to notify the IRS, you can also mail in a Form 8822, Address Change Request.

Tip #68
Medical Expense
Unreimbursed medical expenses for you, your spouse, and any dependent are deductible on Schedule A to the extent that the expenses exceed 7.5% of your adjusted gross income. The definition of what constitutes a medical expense is very broad and includes expenses to diagnose, cure, mitigate, treat or prevent disease. However, cosmetic surgery is not deductible unless it is related to disfigurement from a congenital abnormality, accidental injury, or a disfiguring disease. Other examples of nondeductible medical expenses are nonprescription drugs, doctor prescribed travel for "rest", and expenses for the improvement of your general health such as a weight-loss program or health club fees (the weight-loss program is deductible if it is to treat a specific disease).

Examples of deductible medical expenses include: abortions, acupuncture, alcoholism (treatment costs), ambulance costs, birth control pills, child birth classes, chiropractors, contact lenses, crutches, dentist, dentures, doctor fees, drug addiction treatment, prescription drugs, dyslexia (reading programs and tutors), eye examination and glasses, guide dogs, health insurance, hearing aids, hospital bills, insulin, laboratory fees, long-term care insurance, nursing home (if for medical treatment), optometrist, osteopath, physical therapy, psychiatrist, psychologist, travel to medical clinics and wheelchair. This list does not contain every medical deduction available.

Tip #69
Medical Home Improvements
Home improvements for qualified medical reasons are deductible to the extent that the cost exceeds the increase in the value of your home from the improvement. Examples of home improvements for medical reasons are remodeling a bathroom to make it more accesible, installing an elevator, or constructing a swimming pool for arthritis treatment.

Tip #70
Amended Returns
If you made a mistake on your tax return, the way to correct the mistake is to file an amended return, Form 1040X. Usually, you should wait until the IRS processes your tax return before filing the amended return. If it is a mistake such as entering an incorrect amount of federal tax withheld, the IRS will usually catch the error and correct it when they process your tax return. If the IRS corrects the mistake, then you don't need to file an amended return. Once the IRS processes your tax return and you get your refund, if the mistake wasn't corrected by the IRS, then you need to file Form 1040X which can be downloaded from the IRS web site, www.irs.gov.

Tip #71
Moving Expenses
Moving expenses are limited to transportation costs for your family and belongings, packing costs, certain lodging costs, and certain storage costs. You can either deduct your actual automobile expenses or the standard mileage deduction of 18 cents a mile. For lodging costs, you can deduct the lodging expense for the night before the move, the nights during the move, and the night after you arrive at your new city. For storage costs, you can deduct the first 30 days of storage expense. Other expenses such as meals, temporary living costs, and house-hunting trips are not deductible.

To be qualified moving expenses, the move must be job related, meet the 50 mile test, and meet the time test. The 50 mile test is met if the distance from your old home to your new workplace minus the distance from your old home to your old workplace is greater than 50 miles. The time test is met if you work full-time for 39 weeks in your new home town during the first 12 months after your move. Moving expenses are calculated on Form 3903 and deducted on page 1 of Form 1040.

Tip #72
Excess Social Security
If you worked for more than two employers in 2006 and made more than $94,200 in wages, you may be able to claim a credit for the excess social security tax withheld from your salary. If you paid more than $5,840 in social security taxes shown in box 4 of your W-2s, then the excess social security is a credit on your tax return. Don't include your spouse's social security tax withheld in the calculation. Each person's social security tax withheld is looked at separately in calculating the excess social security credit.

Tip #73
Gift Returns
You do not need to file a gift tax return, Form 709, if you did not give more than $12,000 to any one person other than your spouse during 2006. If you are married, then you and your spouse can gift a total of $24,000 to any person without having to file a gift tax return.

Tip #74
Alternative Minimum Tax
Remember to consider the Alternative Minimum Tax (AMT) when doing your tax planning. Large unreimbursed job expenses, medical expenses, incentive stock options, and state tax payments are common reasons for the AMT to be triggered on your tax return.

Tip #75
Lifetime Learning Credit
A credit of up to $2,000 per student is available for any college tuition paid during a year that the Hope credit or Education deduction is not claimed for that particular student. The credit is 20% of any tuition or class fees paid up to $10,000 (for a total allowable credit of $2,000). Athletic fees, housing costs, student activity fees and books are not eligible expenses for the Hope or Lifetime learning credits. The credit phases out for married taxpayers with adjusted gross income between $88,000 and $108,000. For single taxpayers and others not filing a joint tax return, the adjusted gross income phase out is between $44,000 and $54,000. If your income is too high to take the Lifetime Learning credit for your child's education expenses, IRS regulations allow your child to claim the Lifetime Learning credit on his or her own tax return as long as you do not claim your child as a dependent on your tax return. Alternatively, you may still be eligible for the education deduction which has a higher income limitation

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