Fidelity Select Fundranker

Fundranker Blog—Tax Tips Category

Gain on Technology Is Almost Long-Term

Fundranker has held Select Technology since 5/4/09, but it has fallen out of the Top Eight Model Portfolio for April and is due to be exchanged on April 5, just one month short of being considered long-term for federal income tax purposes.

If you hold Select Technology in a taxable account, and since we have gained nearly 50% on it to this point, you may want to consider holding it one more month so the gain can become long-term. If you wait until 5/5/10 to exchange your shares, you will have held them more than one year, and you’ll be able to take advantage of the lower, long-term, capital gain tax rates for 2010: 0% for the 10% and 15% brackets and 15% for higher brackets. Take special note that you have to hold your shares more than one year, so if you bought them on Fundranker's 5/4/09 exchange date, you must hold them until at least 5/5/10 to qualify for long-term.

Although one of Fundranker’s basic premises is to move each month without fail into the new set of Top Eight Model Portfolio funds, Select Technology only fell to number 13 in the rankings at the end of March, so you would not be fudging the system by much, and your tax advantages could be considerable. Also, it wouldn’t be much of a stretch for Select Technology to move back into the Top Eight Model Portfolio in May.

If you do decide to wait until May to sell your shares of Select Technology, then you would have three exchanges for April 5 instead of four:

  • Sell Communications Equipment (FSDCX), buy new number four ranked fund
  • Sell Retailing (FSRPX), buy new number five ranked fund
  • Sell Electronics (FSELX), buy new number seven ranked fund

With these exchanges, you would end up holding Select Technology at least another month, and you would not buy the new number eight ranked fund. For the names and symbols of these new top-ranked funds, see the April 2010 newsletter, which was emailed to subscribers on April 1.

Posted 4/2/10 12:15pm ET in Fundranker, Tax Tips | Permalink | Comments (0)

Making Work Pay Tax Credit for 2009 and 2010

The Making Work Pay tax credit for tax years 2009 and 2010 came about as part of the American Recovery and Reinvestment Act of 2009, which was signed into law by President Obama in February, 2009, to help stimulate the economy in the depths of the Great Recession.

Under the Making Work Pay tax credit, working people are supposed to receive up to $400 per year ($800 for married taxpayers filing jointly) of a refundable credit against their federal taxes. Refundable means that if any remains after it is applied against your tax, it will result in a tax refund. The Making Work Pay credit begins being phased out for single taxpayers at an AGI of $75,000 and for married taxpayers filing jointly at an AGI $150,000.

The whole idea of this tax credit was to get money in the hands of working people as soon as possible so they could spend it and stimulate the economy, so withholding tax tables were changed as of April 1, 2009, and workers started receiving a little bit more take home pay for the remainder of the year. Those little bits, over the last nine months of 2009, as well as over the entire 12 months of 2010, should add up to about $400 ($800 for married taxpayers filing jointly).

When you fill out your 2009 federal tax return, and you get down to the Payments section of your Form 1040, you’ll put down your withholding, which should be about $400 ($800 for married taxpayers filing jointly) less than it would have been had the tax credit not existed, and then you’ll also put down $400 ($800 for married taxpayers filing jointly) for the tax credit. So your tax payments should add up to about the same amount as they would have had the tax credit not existed, but Uncle Sam contributed $400 ($800 for married taxpayers filing jointly) of it for you. He just gave the credit to you a little at a time during the year instead of giving it to you all at once when you file your tax return.

A few taxpayers may find that their employers cut their withholding too much during 2009. If you have more than one job, or you and your spouse both work, remember that your different employers are unaware of your income from the others. They simply look up your payroll withholding according to the number of allowances on your W-4 form. It was up to you to make sure that you claimed the appropriate number of allowances on your 2009 Form W-4 so that your employers didn’t cut your withholding too much during the year. If you are unpleasantly surprised at how this works out on your 2009 tax return, make sure you update your 2010 Form W-4 right away.

Posted 4/1/10 7:20pm ET in Tax Tips | Permalink | Comments (0)

Education Tax Credits for 2009

If you, your spouse, or one or more dependents had qualifying postsecondary education expenses in 2009, don’t miss claiming your education tax credit on federal Form 8863. The American Opportunity credit is new for 2009, and the Hope and Lifetime Learning credits are still available, as well, although the Hope credit is useful now only if you need to claim qualifying educational expenses for a student who attended a school in a Midwestern disaster area. Instead of the above education credits, you also still can claim the tuition and fees deduction on federal Form 8917 for 2009. It is limited to $2,000 or $4,000 depending on your gross income less other deductions, is deducted from your gross income, and lowers your AGI. As such, it hardly ever lowers your federal tax as much as the above credits, and we won’t discuss it any further in this post. As an aside, you may be able to reduce your state income tax for 2009 by claiming qualifying education expenses, as well.

The American Opportunity education credit, new for 2009, allows you to claim a tax credit of 100% of the first $2,000 and 25% of the next $2,000 of qualified education expenses for each student, for up to a maximum $2,500 tax credit per student, for the first four years of postsecondary education. Even better, if you are at least 24 years old (see Form 8863 instructions if you were younger than 24 at the end of 2009), 40% of each student’s tax credit is refundable, meaning it will increase your tax refund, even if you donít owe that much tax. If you claim the American Opportunity credit for any student, you cannot claim the Hope credit for other students, but you can claim the Lifetime Learning credit for other students. The American Opportunity credit is phased out beginning at $80,000 AGI for single taxpayers and $160,000 AGI for married taxpayers who file jointly.

If you have a student who attended school in a Midwestern disaster area, the Hope education credit allows you to claim a tax credit of 100% of the first $2,400 and 50% of the next $2,400 of qualified education expenses for each student, for up to a maximum $3,600 tax credit per student, for the first two years of postsecondary education. If you have other students who did not attend school in a Midwestern disaster area, the Hope education credit allows you to claim a tax credit of 100% of the first $1,200 and 50% of the next $1,200 of qualified education expenses for each student, for up to a maximum $1,800 tax credit per student, for the first two years of postsecondary education. If you claim the Hope credit for any student, you cannot claim the American Opportunity credit for other students, but you can claim the Lifetime Learning credit for other students. None of the Hope credit is refundable, and it is phased out beginning at $60,000 AGI for single taxpayers and $120,000 AGI for married taxpayers who file jointly.

The Lifetime Learning education credit allows you to claim a tax credit of 20% (or 40%, if your student attended school in a Midwestern disaster area) of the first $10,000 of qualified education expenses for all students together, for up to a maximum $2,000 (or $4,000) tax credit. This credit can be used for any number of years of postsecondary education. None of it is refundable, and it is phased out beginning at $60,000 AGI for single taxpayers and $120,000 AGI for married taxpayers who file jointly.

Check various combinations of the three credits to see which is best for you. For example, if you have only one student, she attended school in a Midwestern disaster area, and she had $10,000 of qualifying expenses, you could claim a $2,500 American Opportunity credit, a $3,600 Hope credit, or a $4,000 Lifetime Learning credit. If you have two students, neither attended school in a Midwestern disaster area, and they each had $5,000 of qualifying expenses, you could claim a $5,000 American Opportunity credit, a $2,500 American Opportunity credit along with a $1,000 Lifetime Learning credit, or a $2,000 Lifetime Learning credit. If you have two students, one attended school in a Midwestern disaster area and had $10,000 of qualifying expenses, and the other had $4,000 of qualifying expenses, you could claim a $5,000 American Opportunity credit for both students, a $5,400 Hope credit for both students, a $4,000 Lifetime Learning Credit for both students, or a $4,000 Lifetime Learning credit for the student who attended school in a Midwestern disaster area along with a $2,500 American Opportunity credit for the student who didn’t.

When you are figuring out which option is best for your situation, remember that, if the nonrefundable portion of your education credit is limited by the amount of your income tax, it’s possible a smaller American Opportunity credit, which is partly refundable, may be better than a larger Hope or Lifetime Learning credit.

Posted 3/16/10 10:35am ET in Tax Tips | Permalink | Comments (0)

Unrelated Dependent

Are you working long hours, possibly more than one job, and supporting your significant other while she’s out of work? Is your unemployed college buddy mooching off you during a long and unsuccessful job hunt? Have you taken in your daughter’s soccer team buddy because her home life wasn’t working? It’s not obvious, and it may surprise you, but you may be able to claim an unrelated person as a dependent on your 2009 federal tax return.

There are several tests to determine whether an unrelated person is your dependent. If you and your potential dependent pass all of these tests, get ready to save a bundle on your taxes:

  • Is your potential dependent a qualifying relative? It’s easy to jump to the conclusion that she isn’t a qualifying relative, because, well, she’s not related to you in any form or fashion. Take a close look at the IRA definition of a qualifying relative, however, and you’ll see that it includes, in addition to various real relatives, any other person who lived with you all year as a member of your household if your relationship did not violate local law. Note that the 2009 Form 1040 instructions list some exceptions that still count as living with you, such as going to school or on vacation. So if your potential dependent lived with you for all of 2009, and your relationship did not violate local law, you pass this test.

  • Is your potential dependent a qualifying child of any taxpayer for 2009? Because she is not related to you, she’s not your qualifying child, and if she lived with you the entire year, then she can’t be a qualifying child of anybody else, either. You easily pass this test.

  • Did your potential dependent have gross income of less than $3,650 in 2009? If so, you pass this test.

  • Did you provide over half of your potential dependent’s support in 2009? Well, does she have some other means of support? Is the support you provide more than her other means of support? If so, you pass this test.

  • Was your potential dependent a U.S. citizen, a U.S. national, a U.S. resident alien, or a resident of Canada or Mexico? If so, you pass this test.

  • Was your potential dependent married? If not, you pass this test.

  • Can you yourself be claimed as a dependent on someone else’s 2009 tax return? If you are providing have of your potential dependent’s support, it’s unlikely someone else is providing half of your support. You should pass this test easily.

So if you pass the above tests, just how much can you save on your taxes? An additional dependent allows you an extra exemption, which, for 2009, shaves $3,650 off your taxable income. If you are in the 25% tax bracket, that amounts to tax savings of over $900. If you also are paying education expenses for your unrelated dependent, you can save big with an education tax credit. To top it off, you probably will save money on your state income tax, as well.

Posted 3/7/10 11:21am ET in Tax Tips | Permalink | Comments (0)

2009 Qualified Dividends

Fidelity shows qualified dividends paid on funds in a taxable account at www.fidelity.com and on 2009 Form 1099-DIV. These dividends are from companies the funds held for the required holding periods to qualify as qualified dividends. In addition to meeting the holding period within the fund, however, you also have to hold your fund shares for the required holding period for your dividends to be qualified. To pass the qualified dividend holding period test, you must hold your fund shares for a period of at least 61 days, which can precede, straddle, or follow the ex-date of the dividend.

Fidelity paid dividends on several funds in Fundranker’s Top Eight Model Portfolio in April and December, 2009. Here is a list of those dividends, ex-dates, days Fundranker held shares in the funds, and whether those days pass the qualified dividends holding test:

        Fund   Ex-Date Days Pass?
Chemicals (FSCHX) 12/11/2009   32 No
Electronics (FSELX) 4/17/2009   32 No
Gold (FSAGX) 12/11/2009   62 Yes
Materials (FSEPX) 12/11/2009   62 Yes
Multimedia (FBMPX) 12/11/2009   32 No
Pharmaceuticals(FPHAX) 4/17/2009 215 Yes
Telecommunications (FSTCX) 4/17/2009   92 Yes

Assuming you bought and sold the above funds on Fundranker exchange dates, the bottom line here is that you should claim dividends that Fidelity reports as qualified for Gold, Materials, Pharmaceuticals, and Telecommunications as qualified dividends, but not those that Fidelity reports as qualified for Chemicals, Electronics, or Multimedia.

If you bought and sold the above funds on dates other than Fundranker exchange dates, or if you held, in a taxable account, other Fidelity funds which paid qualified dividends, you’ll need to calculate your own holding periods to determine whether the dividends Fidelity reports as qualified are truly qualified.

Posted 3/03/10 11:20am ET in Fidelity Investments, Fundranker, Tax Tips | Permalink | Comments (0)

Free E-File Fillable Forms for 2009

Many people hire professional tax preparers at tax time, but there still are plenty of us who feel very comfortable directly filling out tax forms ourselves and eschew using tax software as too cumbersome and as an unnecessary expense. For tax years up to 2008, we do-it-yourself taxpayers have had access to free fillable forms (PDFs) on the IRS website, but we were forced to print and mail the forms because there was no free e-file capability to go along with the free fillable forms.

For 2009 returns, for the first time, the IRS finally has combined free fillable forms with free e-file, and there are no income limits for qualification. Just go to www.irs.gov, click the Free File link in the right hand column, and then click the Choose Free File Fillable Forms button on the next page.

On the Free File Fillable Forms website, select a userid, password, and which form, 1040, 1040A, or 1040 EZ, you want to use. Then, in Step 1, Fill Out Your Tax Forms, fill out the fields on the various forms you need for your return. The fillable forms even have a Do the math button at the bottom, which, as you can guess, does the math for you, so you won’t make any math errors. Click the Instructions for this form button to review IRS instructions for any form. You can save your work and log back in later to complete your return, if necessary.

When you have completed your return, move on to step 2, E-File Your Tax Forms. Enter W-2, 1099, and W-2G information for any of those forms you received. Add your adjusted gross income from 2008, fill in last yearís PIN if you have one, select a new PIN for 2009, enter your date of birth and e-filing date, and choose whether (and when) to pay tax due by electronic withdrawal. Finally, click E-File Now, and you are done. You will receive your refund, if any, by check, or by direct deposit, if you entered direct deposit information on your return. If you owe tax and choose not to pay your tax due electronically, you will need to print Form 1040-V and mail it with your tax due.

Posted 1/21/10 11:15am ET in Tax Tips | Permalink | Comments (0)

Roth IRA for a Child

There is plenty of controversy over the relative merits of traditional IRAs and Roth IRAs for worker-age individuals who qualify for both. In general, you get to deduct contributions to a traditional IRA up front, but you pay taxes when you withdraw money from it after age 59Ĺ on both your contributions and whatever gains accrue; you donít get to deduct contributions to a Roth IRA up front, but you donít have to pay taxes after age 59Ĺ when you withdraw money from it on your contributions or any gains that accrue. Many variables make the decision very difficult to quantify, and some of the questions that arise canít be answered without a crystal ball, such as what tax rates may be like in the future when you withdraw money from your IRA.

But what about that babysitting or lawn mowing money your child makes while she is in middle school or high school? What about that first part-time job she gets at the corner drugstore? Itís pretty likely that with her income level, she wonít even have to file an income tax return, and yet this income is considered after-tax income. You couldnít ask for a better situation for a Roth IRA to make sense. Your child wonít pay income taxes on the income, but she can take full advantage of a Roth IRA. Plus, that money will be in your childís Roth IRA for a long, long time; time during which it can grow and grow and grow.

Your childís Roth IRA contribution for 2009 (contribute by April 15, 2010) is limited to her earned income or $5,000, whichever is less. With the jobs weíre talking about, she is likely to earn less than $5,000. So do you ask her to give up her hard-earned money, which, since she made the effort to earn it, she must want for something else? Well, that depends on your situation. If you think getting your child set up with a life-long investment is important, and you have the means, you can spring for all or most of the money to put in it (you can give up to $12,000 per year to an individual without the gift being taxable). After all, it probably wonít be a large amount the first few years.

You are probably asking, what if my kid only makes $50 babysitting the first year she makes any money? Check with your bank or credit union to see what their minimum requirements are for opening a Roth IRA. Many have very low minimums, so you can start very small.

Because a Roth IRA is not considered for FAFSA (Free Application for Federal Student Aid), it is a great way to save in your childís name, shield those assets from financial aid considerations for college, and yet still have access to at least some of the money for college, as follows.

Your child can make certain withdrawals from her Roth IRA before age 59Ĺ without including the amounts as taxable income or having to pay a penalty: for example, she can withdraw any or all of the contributions she makes over the years, or she can withdraw up to $10,000 for qualified first-time homebuyer expenses, even if they exceed all of her contributions. Investment earnings that accrue in a Roth IRA are another story; if your child withdraws earnings (other than as qualified first-time homebuyer expenses) from her Roth IRA before age 59Ĺ, she will have to include those amounts as taxable income and will have to pay a 10% penalty, as well.

Setting up a Roth IRA is a great opportunity to teach your child the importance of saving for the future. Show her how her Roth IRA may grow over the years from her contributions as well as investment returns. Review various ways her Roth IRA can be invested and decide together which to use. If you want your child to feel more ownership of her Roth IRA, you and your child could agree on a “company matching” strategy, where you play the part of the company and do the matching (probably way more generously than your company matches your 401K), and your child puts in some part of her earnings.

Posted 5/12/09 11:57am ET in Investing, Tax Tips | Permalink | Comments (0)

April 17 Dividends

Fidelity Investments paid dividends on April 17, 2009, the ex-dividend date, for three of the funds in Fundranker’s Top Eight Model Portfolio: Select Electronics, Select Pharmaceuticals, and Select Telecommunications. If you hold any of these funds in taxable accounts, here’s the scoop on how to determine whether your shares in these three funds meet the 61-day holding period test for qualified dividends. Of course, if you purchased or exchange any or all of your shares in these three funds on days other than Fundranker exchange dates, you will have to calculate your 61-day holding periods using those dates. See Select Fund Dividends for more information.

Fundranker’s Top Eight Model Portfolio purchased Select Electronics on April 3, so the underlying shares will not meet the 61-day holding period test until June 3, 2009. If Fidelity Investments reports it on your 2009 Form 1099-DIV as a qualified dividend and Fundranker holds it through June 3, you should report it as a qualified dividend on your 2009 Form 1040. If Fundranker exchanges the fund before June 3, you should not report it as a qualified dividend on your 2009 Form 1040.

Fundranker’s Top Eight Model Portfolio purchased Select Pharmaceuticals on October 2, 2008, so the underlying shares already easily meet the 61-day holding period test for qualified dividends. If Fidelity Investments reports Pharmaceutical’s April 17 dividend on your 2009 Form 1099-DIV as a qualified dividend, you should report it as a qualified dividend on your 2009 Form 1040.

Fundranker’s Top Eight Model Portfolio purchased Select Telecommunications on March 4, so the underlying shares will meet the 61-day holding period test for qualified dividends on May 4, Fundranker’s next exchange date. Even if Fundranker exchanges the fund that day, the underlying shares still will meet the 61-day holding period test for qualified dividends. If Fidelity Investments reports Telecommunications’ April 17 dividend as a qualified dividend, you should report it as a qualified dividend on your 2009 Form 1040.

Posted 4/17/09 9:03pm ET in Fidelity Investments, Fundranker, Tax Tips | Permalink | Comments (0)

Select Fund Dividends

Many of Fidelity Investments’ Select funds will be paying dividends in April. On what is known as the ex-dividend date, the closing NAV of the dividend-paying fund will be adjusted downward by the amount of the dividend. The fund may gain or lose value on that trading day as well, of course, which also will affect that day’s NAV. Essentially, the fund distributes a set amount per share and reduces the closing NAV of each share by that same amount. You end up with the same value, partly as shares and partly as dividend.

If you automatically reinvest your dividends, the dividend amount is used to purchase new shares at the adusted NAV, so you end up with more shares, but with the same value you would have had without the dividend being paid. Fidelity Investments shows pending dividends for your holdings online at www.fidelity.com after 4pm ET on the ex-dividend date. The following morning, your accounts will reflect the new number of shares at the new NAV.

If your Select fund holdings are in a taxable account, Fidelity Investments will send you a Form 1099-DIV shortly after the end of the year that shows dividends distributed during the year. They will be classified as ordinary dividends, qualified dividends, and capital gain distributions. Qualified dividends are included in ordinary dividends, but they are broken out because they may be eligible to receive preferential tax treatment. That is, qualified dividends that fall within the 15% tax bracket are not taxed at all, and qualified dividends that fall in the 25% or higher tax brackets are taxed at only 15%.

Unfortunately, until you receive your Form 1099-DIV, you can’t tell how much of your ordinary dividends is eligible to be treated as qualified dividends. When you do receive your Form 1099-DIV, the qualified dividends it lists really are only potentially qualified dividends. You still have to determine if you held the fund shares which paid the dividends for the required periods. You must hold the dividend-paying fund shares for at least 61 days of the 121-day period beginning 60 days before the ex-dividend date and ending 60 days after the ex-dividend date. When you count the days, include the day you sold shares in a fund, but not the day you acquired them. For example, if you acquired shares 60 days before the ex-dividend date, you could sell them 61 days later on the trading day immediately following the ex-dividend date, or if you acquired shares one day before the ex-dividend date, you could sell them 61 days later, which would be 60 days after the ex-dividend date.

Fundranker held a number of funds in 2008 that paid dividends in April and December. Assuming you made exchanges on Fundranker exchange dates, you held all of the Top Eight Model Portfolio funds that paid dividends in April and December the required 61 days, except for two funds that paid dividends in December, 2008: Select Environmental and Select Utilities (then known as Select Utilities Growth). Qualified dividends reported on your Form 1099-DIV for all other Top Eight Model Portfolio funds can and should be reported as qualified dividends on your 2008 Form 1040, which means they qualify for the preferential tax treatment discussed above.

Posted 4/9/09 1:25pm ET in Fidelity Investments, Investing, Tax Tips | Permalink | Comments (0)

Capital Losses

Even though Fundranker realized short-term capital gains on exchanges in the first half of 2008, the across-the-board selloff we experienced in the second half of the year way more than did in those gains. Fundranker realized sizeable short-term capital losses on exchanges later in the year.

If you realized these capital losses in taxable accounts, the tax code calls for applying these capital losses first against realized capital gains, and then against regular income. Capital losses applied against regular income are limited to $3,000, with the remainder being carried over to the following year. The $3,000 limit is applied regardless of your filing status. It seems unfair, but taxpayers who are married must share the $3,000, regardless of whether they file jointly or separately.

When you have sizeable capital losses, being able to use only $3,000 per year against regular income may make it seem like it will take many years to use them up, but when your investments begin to realize gains again, you can use those capital losses much faster. When you carryover your remaining capital losses to a following year, they again are applied first to capital gains and then to regular income. So when the economy and stock market finally recover, and Fundranker begins to realize capital gains on exchanges, the capital losses carried over from 2008 can be applied against them with no limit. If your capital losses carried over from 2008 exceed capital gains for 2009, then they again are limited to $3,000 that can be applied to regular income, with remaining capital losses carried over still again.

Posted 3/25/09 10:29am ET in Fundranker, Tax Tips | Permalink | Comments (0)

SE Health Insurance Deduction

The self-employed health insurance deduction is a valuable "above-the-line" deduction for self-employed individuals. It reduces your adjusted gross income, which cascades to your benefit on Schedule A itemized deductions as well as various tax credits and possibly on your state income tax return. For 2008, new rules make it easier than ever to claim this deduction if you are a partner with net earnings from self-employment or a more-than-2% shareholder in an S corporation. The rule change is retroactive, so partners and more-than-2% shareholders in S corporations may be able to amend past returns to take advantage of this deduction, as well.

For purposes of this deduction, a self-employed individual is a person who files Schedule C, Schedule C-EZ, or Schedule F with Form 1040, a partner with net earnings from self-employment, or a more-than-2% shareholder in an S corporation with wages reported on a Form W-2. You may be able to deduct premiums paid for medical and dental insurance and qualified long-term care insurance for you, your spouse, and your dependents.

The insurance plan must be established under your business. This is easiest for self-employed individuals who file Schedule C, C-EZ, or F as the insurance plan can be either in the name of the individual or in the name of the business. Essentially, for a self-employed individual, you are your business, so it is the same thing. For self-employed individuals, the deduction generally is limited to the net profit from your business less one-half of your self-employment tax and your self-employed SEP, SIMPLE, and qualified plans deduction.

If you are a partner with net earnings from self-employment or a more-than-2% shareholder in an S corporation, the insurance plan can be in the name of the business or, and this is what is new for 2008, in your name. Your partnership or S corporation must either pay the premiums or reimburse you for premiums you pay, and either way, the premium amounts must be reported as income on Schedule K-1 (partnership) or Form W-2 (S corporation). If your partnership or S corporation reimburses you for only part of the insurance premium amounts, then only that part of the premium amounts is reported as income and is deductible.

You cannot include in your self-employed health insurance deduction health insurance premiums for any month you were eligible to participate in any employer subsidized health plan at any time during that month, even your spouse’s employer, and even if you didn’t participate. This rule is applied separately to plans that do and do not provide long-term care insurance.

The Form 1040 instructions, for some reason, mention self-employed individuals only in passing, give details for S corporations but fail to explicitly mention that the insurance plan may be in the name of the individual, and leave the information out completely for partners with self-employment income. Publication 535, on the other hand, does a thorough job of describing all these situations, so you can find the information, but you have to dig for it.

The IRS doesn’t allow you to double up on deductions, so any deduction you take for self-employed health insurance premiums cannot also be deducted as an itemized deduction on Schedule A of Form 1040. If your self-employed health insurance deduction is less than the total amount of premiums you paid for health insurance, however, you can deduct the remaining premium amount on Schedule A, but it will be subject to the 7.5% AGI reduction of medical and dental expenses.

If you are self-employed, a partner with net earnings from self-employment, or a more-than-2% shareholder in an S corporation, don’t miss out on the new and improved self-employed health insurance deduction.

Posted 3/19/09 11:30am ET in Tax Tips | Permalink | Comments (0)

Real Estate Taxes Deduction

Until 2008, you had to itemize deductions to be able to deduct real estate taxes from your taxable income. If you took the standard deduction, you had to be satisfied that it included your real estate taxes. Now for 2008 returns, you can take an additional standard deduction up to $500 ($1,000 if married filing jointly) for real estate taxes you paid in 2008. The instructions for Forms 1040 and 1040A have a nifty little worksheet to help you figure your standard deduction. Essentially, it adds your real estate taxes, up to $500 ($1,000 if married filing jointly), to your standard deduction.

For taxpayers who usually itemize deductions, instead of comparing your itemized deductions to your standard deduction, you will need to compare them to your standard deduction plus up to $500 ($1,000 if married filing jointly) for your real estate taxes. When you itemize deductions, you can claim the entire amount of real estate taxes you paid in 2008. If your real estate taxes are considerably higher than the $500 or $1000 limits, it may seem counterintuitive to take the standard deduction plus the limited real estate taxes deduction, but you still need to consider it. For example, if your itemized deductions include, say, $2,500 of real estate taxes, but exceed your standard deduction by only $400, then your standard deduction plus $500 ($1,000 for married filing jointly) would be larger and would reduce your taxable income more than your itemized deductions would.

Posted 3/11/09 9:56am ET in Tax Tips | Permalink | Comments (0)

Education Expenses

Education expenses can be reported in four different places on your tax return, which naturally creates some confusion on which place benefits you the most. You can take a Hope credit, a Lifetime Learning credit, or a Tuition and Fees deduction for you, your spouse, and your dependents, and you can take a student loan interest deduction, as well. See IRS Publication 970 for more details. First, let’s review how the credits and deductions work:

For 2008, the Hope credit is limited to $2,400 of qualified expenses ($4,800 if the student attended school in a Midwestern disaster area). The Hope credit equals 100% of the first $1,200 ($2,400) and 50% of the second $1,200 ($2,400), for a maximum of $1,800 ($3,600). For 2008, the Hope credit can be claimed for a student who had not completed the first two years of post-secondary education at the beginning of 2008, who was working toward a degree or certificate, who took at least one-half of a normal full-time workload for at least one academic period in 2008, who has never been convicted of a felony for a controlled substance, and for whom a Hope credit was not claimed in more than one prior tax year.

For 2008, the Lifetime Learning credit is limited to $10,000 of qualified expenses for all students together. The Lifetime Learning credit equals 20% (40% if the student attended school in a Midwestern disaster area) of qualified expenses, for a maximum of $2,000 ($4,000). The Lifetime Learning credit can be claimed for an unlimited number of years, and the student does not need to be pursuing a degree or certificate, can take one or more courses, and can have a felony drug conviction.

For 2008, the Tuition and Fees deduction is limited to $2,000 or $4,000 of qualified expenses for you, your spouse, and your dependents together, depending on your income level.

For 2008, the Student Loan Interest deduction is limited to $2,500 of student loan interest expense for you, your spouse, and your dependents together. Each student must have been enrolled at least half-time in a degree program. Student loan interest can be deducted until the loan is payed off. This deduction can be taken in addition to whichever of the Hope credit, the Lifetime Learning credit, or the Tuition and Fees deduction you take for a particular student, so you should always take this deduction.

Now, let’s consider which credit or deduction you should take. You only get to take one of the Hope or the Lifetime Learning credits for a particular student, so if a student meets the qualifications for both, which should you take for that student? If you have two or more students who qualify for the Hope credit, taking the Hope credit for those students maximizes your education credit. If only one student qualifies for the Hope credit, and that student has qualified expenses less than $9,000, take the Hope credit for that student; for qualified expenses of $9,000 to $10,000, take the Lifetime Learning Credit for that student. Of course, if a student does not qualify for the Hope credit, you should take the Lifetime Learning Credit for that student.

As for the Tuition and Fees deduction, it potentially can reduce your tax by a maximum of $1,000 for all students together, and if you take the deduction for a particular student, you can’t take either the Hope or the Lifetime Learning credits for that student. The only reason you should consider the Tuition and Fees deduction in lieu of either of the two credits is that it reduces your AGI, which in turn can affect your itemized deductions and a number of other tax credits for which you may qualify.

Posted 2/26/09 12:49pm ET in Tax Tips | Permalink | Comments (0)

First-Time Homebuyer Tax Credit

The Housing and Economic Recovery Act of 2008 and the American Recovery and Reinvestment Act of 2009 both have provisions for a first-time homebuyer tax credit. For both of these tax credits, a first-time homebuyer is defined as a person who did not own any other main home during the three-year period ending on the date of purchase. So even if you have owned a home in the past, but not in the last three years, pay attention to these first-time homebuyer tax credits—they can be worth thousands of dollars to you.

The Housing and Economic Recovery Act of 2008 enacted a first-time homebuyer tax credit for homes purchased after April 8 in 2008, which essentially is an interest-free loan. It is a refundable tax credit (you get a tax refund for any amount of the credit that exceeds your tax liability) of 10% of the purchase price of the home up to $7,500, but it has to be repaid over a 15-year period starting in 2010. If you bought a home after April 8 in 2008, make sure you look at Form 5405 to see if you can claim this tax credit.

The American Recovery and Reinvestment Act of 2009, just signed into law by President Obama this month, goes a step farther. If you purchase a home in 2009 before December 1, you maybe able to claim 10% of its purchase price up to $8,000 as a refundable tax credit which does not have to be repaid at all as long as the home remains your main home for three years. If you are thinking of buying a home in 2009, this new tax credit is an excellent reason to get it done before December 1. You even can claim this new, refundable tax credit on your 2008 Form 5405, even though your new home was purchased in 2009. If you buy your home in 2009 after you have filed your 2008 income tax return, you can file an amended 2008 tax return to claim the credit or wait and claim it on your 2009 income tax return.

Posted 2/22/09 7:43pm ET in Tax Tips | Permalink | Comments (0)

QRSC Credit

What is the Qualified Retirement Savings Contribution Credit? To put it simply, under certain conditions, the IRS is willing to reduce your taxes if you contribute to one or more qualified retirement savings plans, which include traditional and Roth IRAs among others (see the instructions for Form 8880). What’s more, you can take this tax credit even if you also take an IRA deduction for your contribution.

Unfortunately, this tax bonanza is not available to all of us. It is phased out when your AGI reaches certain levels. First, only $2,000 of contributions is considered per individual. Second, for 2008, married taxpayers filing jointly with AGI of $32,000 or less, head-of-household taxpayers with AGI of $24,000 or less, and other taxpayers with AGI of $16,500 or less potentially can claim one-half of their contributions as a tax credit; married taxpayers filing jointly with AGI of $34,500 or less, head-of-household taxpayers with AGI of $25,875 or less, and other taxpayers with AGI of $17,250 or less potentially can claim one-fifth of their contributions as a tax credit; married taxpayers filing jointly with AGI of $53,000 or less, head-of-household taxpayers with AGI of $39,750 or less, and other taxpayers with AGI of $26,500 or less potentially can claim one-tenth of their contributions as a tax credit; above these limits, the tax credit is completely phased out. For 2009, for married taxpayers filing jointly, these limits are raised to $33,000, $36,000, and $55,500; for head-of-household taxpayers, they are raised to $24,750, $27,000, and $41,625; for other taxpayers, they are raised to $16,500, $18,000, and $27,750. Third, the potential tax credit also is limited by your tax liability. In other words, this tax credit is not refundable; you cannot get a tax refund because of this credit.

Check this tax credit out when you do your 2008 taxes this year. Form 8880, Credit for Qualified Retirement Savings Contributions, is an uncomplicated form and could save you hundreds of dollars off your federal taxes for 2008.

Posted 1/19/09 8:22pm ET in Tax Tips | Permalink | Comments (0)