Save on Your Federal Income Tax
Never pay more federal income tax
Deductions and Credits
than you have to. Here are the recent changes in tax rules you can use to save money. These ideas will help reduce your federal income tax bill this year. You'll find more valuable federal income tax tips
and explanation of basic tax ideas in this related article in Surfer Sam.
1. Save on Your Taxes with the Recovery Rebate Credit
The Economic Stimulus Check you received
in the summer of 2008 was a prepayment of the Recovery Rebate Credit. It is not taxable. If you didn't get a rebate check, or if you didn't receive the maximum allowed, you could get an additional rebate amount now. The maximum credit is $600 for singles filers, or $1,200 if you are married and filing jointly. If you have qualifying children, you can add $300 to your rebate credit for each qualifying child.
Is your 2008 taxable income
larger than your 2007 taxable income? Do you have more children than you did in 2007? Be sure you recalculate the Recovery Rebate Credit. You may be entitled to an additional credit that will save you money on your federal income tax.
Suppose you calculate your Recovery Rebate Credit
, and realize that the stimulus check you received was too large. Don't worry. The government does not require you to repay any money you received.
2. Save on Your Taxes with the Standard Deduction
The Standard Deduction
is two times better now. There are two new ways you can increase the standard deduction on your tax return and save more tax money. If you paid real estate taxes, but don't have enough deductions to itemize them, you can add up to $500 to your standard deduction. Married taxpayers who file jointly can add up to $1000 to their standard deduction.
In a similar manner, if you paid state or local taxes
this year, but didn't itemize your deductions, you can add the amount of these taxes to your standard deduction. You can add up to $500 of paid taxes to your standard deduction or up to $1,000 if you are married and filing jointly. You will save money on your tax return.
What is the Standard Deduction
? You can choose to itemize all your tax deductions in a list on Schedule A, or, instead, you can choose the standard deduction. If you own real estate, pay a high state tax or have large medical payments, you'll save money by itemizing your deductions. You should calculate your taxes both ways and use the method that saves on your taxes.
3. Save with a Better Alternative Minimum Tax
The Alternative Minimum Tax
has a larger exemption. When the exemption goes up, your can save on your tax bill if the ATM applies to you. For single taxpayers the exemption is $46,200. For married taxpayers filing jointly the exemption is $69,950.
What is the alternative minimum tax
? The alternative minimum tax AMT is a second way to compute your federal taxes. It was designed to prevent high-income people from taking too many deductions and paying too little in taxes. However, now even middle-income people sometimes have to pay the AMT. You must figure the tax you owe under the AMT system, using Form 6251, and pay the higher tax. You might have to pay the AMT is you have job expenses and miscellaneous itemized deductions, or your medical and dental expenses amount to more than 10% of your income. You have large deductions for other taxes paid. You deduct accelerated depreciation, i.e., depreciation deduction more than the straight-line calculation.
4. Save with a Bigger IRA Deduction
The IRA deduction has been increased
. You can deduct up to $5,000 for your IRA contribution on your tax return. If you are over 50, you can deduct up to $6,000. You can take the IRA deduction provided your modified adjusted gross income is less than $63,000. If you file jointly with your spouse, your spouse can also have an IRA with a similar deduction. You and your spouse can claim the deductions as long as your modified adjusted gross income is less than $105,000.
What is an IRA
? An IRA is an individual retirement account you contribute to while you are working, and withdraw from when you retire. Anyone who earns income can set up an IRA for themselves at a bank or brokerage. When you contribute to your IRA, you can take the deduction on your federal income tax return. The IRA tax deduction applies to a regular IRA, but does not apply to a Roth IRA. The difference between a regular IRA and a Roth IRA is that, when you retire, the money you withdraw from a Roth IRA is tax-free, including all the investment earnings.
3. Save Tax with a First-time Homebuyer Credit
Did you buy your home between
April 8, 2008 and July 1, 2009? If you did not own a home during the previous 3 years, you are eligible for this credit. The credit is up to $7,500. It is a temporary refundable credit which reduces your federal income tax liability this year. The First-time Homebuyer Credit is actually an interest-free loan from the government. You must repay the credit in equal annual installments over 15 years. The credit must be repaid in full if you sell the house.
6. Save Taxes with a Business Mileage Deduction
If you drove your car for business use
, and your employer did not reimburse you, you can deduct 50 1/2 cents per mile. If you used your car to get medical care, or to move, you can deduct 19 cents a mile. The rate increases from 19 cents to 17 cents after June 30, 2008. Keep a log to support your mileage deduction.
7. High-income Taxpayers are Saving.
If you are a high-income taxpayer
, your personal exemptions and itemized deductions are being phased out gradually, year by year. However, the phase-out has been slowed down in 2008, which means that you will save on your federal income tax.
8. Save with a Better Capital Gains Tax Rate
Your capital gains rate could be 0% this year
. If you fall into the 10 percent or 15 percent tax bracket, your tax rate on net capital gains is 0%. If you fall into the 10 percent of 15 percent tax bracket, the tax on your qualifying dividend income is also 0%. For the rest of us, the capital gains rate is still 15%.
If you sell stock or bonds
, you usually pay tax on the net capital gains. If you own stocks that pay you dividends, the dividend income is also taxable.
9. Save Taxes in Kansas
If you live in the Kansas disaster area
, there are special tax benefits available this year. For more details, see Publication 4492-A
10. Save Taxes in the Midwest
If you live in the Midwest disaster area
affected by severe storms, tornadoes and flooding, there are tax benefits available to you. For more details, see Publication 4492-B.
11. Save Taxes with the Earned Income Credit
The Earned Income Credit is available
to lower-income taxpayers, whether or not a child lived with you. The credit saves you money on your federal income taxes. The amount of the credit depends on how much you earned and how many children you have. If a child lived with you, and you are single, and you earned up to $38,646, you qualify for the earned income credit. If a child lived with you, and you are married filing jointly, and you earned up to $41,646, you qualify for the earned income credit. For single or married taxpayers with no children, the maximum credit is $438.
12. Save with Residential Energy Efficient Property Tax Credit
Did you install solar electric
, solar water-heating or wind alternative energy systems in your house in 2008? You can take a credit of 30% of the cost, up to a maximum of $2,000 in each category. On your federal income tax return, a credit saves you more money than a deduction. This 30% credit is a substantial saving on your federal income tax.
In past years, you could claim a credit for Nonbusiness Energy Property
. That tax credit has expired after 2007. You can no longer claim a credit for installing energy-efficient doors and window in your home or insulating your attic.
I hope life brings you much success.
I wish you a very happy day.
Return to the complete index of new blogs.