Deducting Tax Advice Fees

I tend to prepare my own taxes, but came across a post yesterday asking if tax advisory fees can be deducted from returns. The answer is technically yes, but the average taxpayer is unlikely to qualify.

Tax preparation fees fall under "miscellaneous itemized deductions." Other items in this category include job search fees, union, dues, legal fees related to tax advice, and even safety deposit box fees (provided that they hold investment related goods).

However, miscellaneous deductions are only deductible to the extent they exceed 2% of your adjusted gross income. So, if your income was $100k and you had $3k in miscellaneous expenses, then you would only qualify for a deduction of $1,0000. It should also be noted that while investment advice qualifies under miscellaneous itemized deductions, broker commissions don't.

You can read more about the wonderful world of miscellaneous itemized deductions in Pub 529 (note this is a pdf document) over at the IRS website.

Image: Blmurch @ Flickr

FULL DISCLOSURE, I'm not a CPA and don't pretend to be. Consult a tax attorney or CPA for your specific tax questions.

Most Overlooked Tax Credits and Deductions

It's approaching that time of the year. It's a time that no one is particularly fond of, but if you have to pay taxes -- you might as well only pay your fair share. H&R Block recently posted an article on its website about the top 10 overlooked credits and deductions. The top 10 are listed below.

1) Earned Income Credit
- Available to low-income workers.

2) Child Tax Credit
- $1,000 for each child, the amount you can claim for each child decreases once your adjusted gross income hits $75,000 as a single filer or $110,000 jointly filing.

3) Saver's Credit
- Get credit for up to half you contribute to a retirement plan. Restrictions apply.

4) Education Tax Benefits
- Hope Credit: 100% credit of first $1,100 and 50% next $1,100 per student for tuition and fees with a max of $1,650. Restricted to your first two years of college.
- Lifetime Learning Credit: Credit of 20% annual tuition and fees. Max $2,000. Unlimited number of years.
- Tuition and Fees Deduction: Allows you to deduct up to $4,000 for tuition and fees.
- Student Loan Interest Deduction: Deduct up to $2,500 per return for interest paid on student loans.

5) Medical Expenses
- Deduction available if you spend more than 7.5% of your income on medical expenses (you must itemize to claim).

6) Moving Expenses
- You can claim this even if you don't itemize so long as your move was 1) job related, 2) would have increased commute by more than 50 miles, 3) were employed full time at least 39 weeks during the 12 months after you moved, 4) your moving expenses weren't reimbursed by your employer.

7) State & Local Taxes
- If you itemize, you can claim your state and local sales tax or income tax. You will need receipts if you choose to claim the sales tax deduction.

8) Charitable Donations
- If you itemize you can deduct these, but keep your receipts for money donations, items donated, or mileage while driving for charity.

9) Out of Pocket Job Expenses
- These are deductible provided you keep records and are not reimbursed by your employer.

10) Self-employment Deductions
- Half your self-employment tax, up to $112,000 of new or used business equipment purchased this year, your home or office furniture if its used solely for your business.

You can also follow the link here to read more about each credit (but whatever you do, if you have H&R Block prepare your taxes -- please don't sign a tax refund loan).

Think Dual Incomes is a Great Thing? Not Always

The prospects of having two incomes to support household expenses sounds great. What's not to love? Double the money to pay bills, send your kid to college or enjoy life. Well that pesky "marriage tax" makes the calculation a little more difficult. True, individually two incomes are great, but in married couples are subject to different tax scales. There is a point of diminishing returns as your combined income gets higher and higher.

Take this hypothetical:
John makes $75,000 per year. Jane (his new wife) makes $50,000. Combined they bring in $125,000 yearly. If both work full-time childcare expenses will be $500 per month before and after school. Jane will also spend $1,000 a year to commute to and from work. Let's also say the local tax rate is 6% and they don't have a flexible spending account to sock pretax money for the additional childcare expenses.

Individually John would be in the 25% tax bracket approaching the 28%. Jane would be in the 25% tax bracket. While they individually hit the 28% tax bracket at $77,100, as a married couple they don't hit this bracket until $128,500. So, for income tax there is no real difference assuming that they don't get salary increases to move them into the 28% bracket.

However, the real problem is they will lose out in a lot of other ways. They will be taxed more for social security and medicare (jumping to 7.65% up to $97,000 then 1.45% thereafter. The child tax breaks begin phasing out at $110,000, they will also be unable to claim the Hope Education credit. The effective tax rate is a whole lot more than what the charts show.

So back to the fact scenario above. Assuming the very broad facts laid out above in my hypothetical the actual take home from Jane's $50,000 salary will be around
$27,425 or to put it a different way she nets 54.85% after costs and taxes. This is obviously a very rough estimate and there are lots of variables, but it's helpful to think about some of the other factors aside from just the salary figure. Try the calculator SmartMoney has created to simplify these factors and read about other potential problems that might come up.

Note: I'm not implying that the $20,000+ take home is a small sum, just that there are diminishing returns for high income couples and there are more variables to take into account. The $27k would most definitely be worth it for me. I also acknowledge that there are a lot of soft factors not in the equation. Lots of families decide that soft factors like spending more time with their spouse or raising children should trump extra income. That is a great decision for many people and I don't want to discount that - however, it would take an economist to figure out the opportunity cost (which I don't pretend to be) so it has been left out of my analysis. I would guess that if it was added in it would make a spouse staying home more attractive to some and less to others.

Link

Smart Money Should You Go Back to Work Calculator

Tax Crunch Time

Only a little over a week till tax time is here. With that in mind, here's are some quick links to what other blogs are saying about it.

Getting Green has an article about 10 Ways to Avoid an Audit.

Additionally, the IRS has a list of the top five most overlooked items by taxpayers in their 2006 tax returns.

Those of you paying someone to prepare your taxes may be interested in the article on TaxProf Blog about the government charging 125 Jackson Hewitt franchises with tax preparation fraud.

People using popular tax preparation software packages like TurboTax or TaxCut can find coupon codes for H&R Block's TaxCut software over at FIRE Financial.

Living Almost Large has a nice article about her philosophy as to when it makes sense to pay off a mortgage early.

If you are still hungry for more tax goodness, Don't Mess with Taxes has a variety of other Tax related links.

...don't forget to thank your local IRS auditor for all the wonder this time of year brings.

Tax Time: Big Time Write-offs

If you have a home business or office you can legally write-off a lot of things you might not expect (provided they have a use related to your office). Like most laws, tax laws use the terminology that is vague at best and baffling to most. Luckily there are CPA types who love this stuff that the rest of us find mind-numbingly boring.

To write off an item it must be "reasonable and customary" and connected to a trade or business. The good thing is that as the CPA says in this article, "there's almost nothing that isn't deductible under the right circumstances." This article describes tax write-offs for car, mileage, educator expenses, big screen TV, and higher education expenses. While it might be a good start, a better place to get deductions obviously is to call up your local CPA.

MSN Money: Taxes

Don't Forget the Telephone Tax Break

The government has offered to give $30-$60 back to each American in the form of a telephone break. Any money you can get back from the tax man is good and you may say that you had a professional file your return so you are safe. Think again. The IRS is estimating that 10 million Americans already have forgotten to file for the credit costing them $300-$600 million dollars in lost refunds. Already file? No problem. There is a form you complete in less than 30 mins to collect your money. Here is a step by step tutorial to bypass the fluff and get your money fast.

Read full article here.

It's Tax Time: Articles Abound

For those of you avoiding this dreaded time of the year CNN.com ran a story this week about often overlooked tax breaks people don't take advantage of. The article isn't ground breaking, but may be helpful to those of you doing taxes the "old fashioned way." Those of you using TurboTax, TaxCut or any other of the commercial tax software packages you can probably skip it.

The gist of the the story is that there are tax breaks for professional periodicals, real estate taxes, tuition, state taxes, self-employed, retirement savings, child care, telephone service, and energy efficiency.

Check out the full story over at CNN