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First of all, the IRS has a gift for you: an extra three days to file your returns! Individual taxpayers will have until Monday, April 18, to file their returns. The reason: Friday, April 15, is a legal holiday in the District of Columbia, and because D.C. holidays affect tax deadlines in the same way federal holidays do, all taxpayers are being given an extra three days to file their returns. Now, on to your tax return: Claim these often overlooked deductions and credits and you just might be able to pay less to the IRS.
IRA/Roth Conversion
When you contribute to an individual retirement account, you help fund a future goal while lowering your current tax bill. In other words, socking cash in an IRA is like saving with help from your Uncle Sam. The rules are pretty simple: You have until tax filing (again, that's April 18) to contribute up to $5,000 to a 2010 IRA ($6,000 if you are 50 or older). If you are self-employed, have a Keogh or SEP-IRA, and have filed for an extension to October 15, you can even wait until then to put 2010 money into those accounts. Even if you're covered by a retirement plan at work, you can deduct some or all of your IRA contribution if you are single and your income is less than $66,000 (less than $109,000 if married). If you are not covered by a workplace retirement plan but are married to someone who is, you can deduct some or all of your IRA contribution if your joint income is less than $176,000 or less. Roth IRA conversion rules: Just a reminder for those who converted from a traditional IRA into Roth IRA in 2010 -- don't forget that you now owe taxes! The amount of money that was converted is considered income that can be spread over a two-year period, beginning in 2011. This means you include one-half of the amount as income in 2011 and the other half as income in 2012. You can elect to include all of the income in 2011, which may be advantageous if your tax bracket is likely to be lower in that tax year than it will be in the future. See Form 8606.
must begin repaying it in equal payments for 15 years. If the taxpayer no longer lives in the house, then the credit must be repaid in full with the next tax return. Taxpayers who claimed the credit in 2009 and 2010 will not have to repay it unless the house is sold or no longer their principal residence within three years of purchase. Energy and Appliance Tax Credit: If you made any energy-efficiency improvements to your home in 2010, you may be eligible for a tax credit. You can deduct up to 30% of the cost -- up to $1,500 -- for many energy improvements to your existing home. Note that the credit does not apply to rental properties or new homes. Approved improvements include new windows, insulation, high efficiency furnaces, water heaters and air-conditioning. It also covers alternative energy such as solar equipment, small wind turbines and fuel cells.
College Costs
The Hope Credit was been replaced with the American Opportunity Tax Credit. Each student can now get a $2,500 "higher education tax credit" for the first four years of college. The credit is based on 100 percent of the first $2,000 of tuition and related expenses, including books, paid during the tax year, plus and 25 percent of the next $2,000 of tuition and related expenses paid during the tax year (subject to income phase-outs starting at $80,000 for singles and $160,000 for joint filers). The December tax compromise included a new deduction for families with college costs. Every family can deduct up to $4,000 of college tuition and fees in 2010 and 2011. Note: The new form for taking this deduction will be available from the IRS in February. Also, for anyone with a 529 college savings plan: Computers and Internet access qualify as "qualified education expenses" for the 2010 tax year, so you can pay for them tax-free.
Sales tax: You can deduct sales tax paid in 2010 if the amount was greater than the state and local income taxes you paid. In other words, you get to choose: Write off your sales taxes or write off your income taxes. If you didn't keep your sales-tax receipts, use the IRS' sales tax deduction estimator. Even if you claim the sales tax amount from the IRS tables, you can add in tax paid on vehicles or boats purchased during the year, except to the extent the sales tax rate on them is more than the general sales tax rate. If you live in a state with a high income tax, like California or New York, you will probably be better off claiming your state and local income taxes rather than sales taxes. If you live in a state with no income tax, like Florida, Texas, or Washington, be sure to take the sales tax deduction when you itemize. Medical expenses: This one is hard to claim, because the bar is so high to qualify. You can only deduct the portion of your 2010 medical expenses that exceed 7.5 percent of your adjusted gross income. Mileage: Deducting miles driven for work or other purposes can be a huge tax break and save you significant money. Too bad the IRS cut the standard mileage deduction rates for 2010. Here are the new rules: Business mileage = 50 cents per mile (a 9 percent cut!); medical and moving = 16.5 cents per mile; and charitable = 14 cents per mile. One last thing: The first $2,400 of unemployment benefits you receive in 2010 is no longer tax-deductible.