2011 Capital Loss Deduction

When it comes to taxes, the more tax deductions the better. And, when you lose money on an investment, a tax deduction can take out a little of the sting. However, deducting capital losses can be tricky. Get the rules straight to save on taxes and avoid making mistakes.

Just like with capital gains, there are two kinds of capital losses, short-term capital loss and long-term capital loss. Generally, a long-term capital loss occurs when you have a loss on an investment that you have held for at least one year. Conversely, a short-term capital loss occurs when there is a loss on an investment held for less than a full year.

The tax deduction for capital losses is limited to $3,000 per year against regular income. That means that you can get a full deduction of up to $3,000 each year, regardless of whether you have any other capital gains. Capital losses are a itemized deduction, so they won’t help if you are taking the standard deduction.

Offset Capital Gains with Capital Losses

However, you can offset an unlimited amount of capital gains with corresponding capital losses. For example, if you had an investment that gave you a $10,000 capital gain, and you have another investment that generated a $10,000 capital loss, you can offset the entire $10,000 gain. That means that you do not pay any capital gains taxes on the $10,000.

There is a catch, however.

In order to offset gains with losses, the type of loss must match the type of gain. In other words, in order to offset long-term capital gains, you must have long-term capital losses. You cannot use a short-term capital loss to offset a long-term capital gain, or vice versa.

It does not matter if your capital loss is short-term or long-term when it comes to deducting the $3,000 above and beyond any investment gains that you have for the year.

Capital Loss Carryover

If you have more losses than gains to be offset, only the first $3,000 of the losses can be deducted from ordinary income. However, the remaining amount is not lost. Rather, losses can be carried forward to be used on future year’s taxes.

Revisiting our example, assume that you have a $10,000 capital gain for the year, but you have $20,000 in capital losses. You can completely offset the $10,000 gain, meaning you owe no capital gains taxes this year. However, you can only deduct $3,000 of the remaining $10,000 of losses against your regular income. That leaves $7,000 of loss that can be carried forward to next year’s taxes.

In the following year, you can use the entire $7,000 to offset any capital gains. If you have no gains, you can still deduct the $3,000 allowance against ordinary income for the year.

So, if the following year you have $5,000 in capital gains, you can offset all $5,000 and still use the remaining $2,000 in losses as a deduction against ordinary income.

How To Claim a Capital Loss

Capital gains and losses are calculated and reported using Schedule D of Form 1040 and entered on Line 13 of Form 1040.

What is most important about capital losses is that you remember to carry them forward. Users of tax software like Turbo Tax or Tax Cut have this data automatically carried forward by the program if you import last year’s tax returns when you start filing your taxes with the software. However, taxpayers who do their taxes by hand or that switch accountants or tax software need to ensure that their previous year losses are carried forward. Large losses can take years to use up if there are no corresponding large gains to use them against.

Many people have big capital losses to use thanks to recent market volatility. Even if you have tens of thousands of dollars of losses or more, be sure to continue to carry the amount forward. Some day, you’ll make money on an investment and those losses will keep you from having to pay taxes on your gains.

Capital losses can be carried forward forever with no limit on how long they may be used.

Be sure to also understand short sales for capital gains.

Related posts:

1. 2011 Section 179 Deduction Limits for Small Businesses Taxes
2. Standard Deduction 2011 and 2011 Tax Brackets

Capital Loss Tax Deduction 2011 originally published at Finance Gourmet

Mortgage interest is tax deductible. Up to 100 percent of mortgage interest paid during the tax year can be deducted on your income taxes as long as your total mortgage balance is less than $1 million. In other words, unless you have more than $1 million in mortgage loans, you can deduct all of your mortgage interest.

Is Mortgage Interest an Itemized Deduction?

Mortgage interest is an itemized deduction. In fact, for the majority of taxpayers who get most of their income form a regular job at a company where you have taxes withheld from your paycheck based on your W2 form, the mortgage interest you pay determines whether or not you should itemize your taxes or file with the standard tax deduction. For business owners filing a Schedule C or those with a large amount of investment or interest income, that will not apply.

How To Decide Whether to Take the Standard Deduction or Itemize

The standard deduction for 2010 is $5,700 for single filers and $11,400 for married filing joint taxpayers. If the amount of mortgage interest reported on Form 1098 is close to, or above that number, then you should itemize your tax deductions. If the mortgage interest paid is significantly less than the standard deduction, then chances are that you won’t have more itemized tax deductions than the standard amount.

The exception is if you have significant other deductible expenses such as charitable donations or medical expenses (above 7.5 percent of your income). You can do an estimate of whether you should itemize or not by taking the standard deduction amount and subtracting your mortgage interest and real estate taxes reported by your lender or mortgage company on Form 1098. The amount remaining is how much you have to deduct to make itemizing worth it. Don’t count IRA contributions, moving expenses, or student loan interest, all of which can be deducted without itemizing. Whatever amount is left is how much you have to find by itemizing to make beat the standard deduction.

How To Deduct Mortgage Interest on Tax Forms

When you file your income taxes, the main form you use is Form 1040. If you itemize tax deduction, then you file Schedule A for Form 1040.

Where you deduct mortgage interest on taxes is on Schedule A. The entire amount of interest paid on your mortgage that is reported by your lender or bank on Form 1098 is entered on Line 10 of Schedule A.

Any amount of real estate loan interest that is deductible but not reported on a Form 1098 is entered on Line 11 of Schedule A.

Note that if you pay your January mortgage payment early as a way to do some end of year tax planning, your mortgage company may not include that amount on your Form 1098. Be sure to add up your mortgage interest payments for the year yourself. If that payment is not included on the 2010 Form 1098 you receive, include it on Line 11. Be sure not to double count the payment on your 2011 taxes if your mortgage lender includes the amount on next year’s 1098 Form!

Related posts:

1. How To Deduct Property Taxes
2. New 2010 Tax Numbers Released By IRS For Filing 2010 Income Taxes in 2011

How To Deduct Mortgage Interest on Income Taxes originally published at Finance Gourmet

As 2010 draws to a close, it is time for the annual publishing of the end of year tax tips articles. Or, for the mainstream media, it’s time to re-publish pretty much the same thing that was published last year, rehashing the same old annual tax savings strategies.

I thought we’d go ahead and get a jump on them (Isn’t that what good personal finance blogs are for?) by pre-posting all of the standard, run of the mill, year-end tax tips before Thanksgiving. Of course, if you are serious about tax planning, you’ve already done all of this and more. Don’t worry, we’ll be publishing new, little-known, tax tips and end of year tax tricks for 2010 soon.

Here they are the Common 10 Tax Reduction Strategies for 2010

(and 2011, 2012, 2013, etc…)

1. Donate To Charity – Definitely a good write off for high-income taxpayers and everyone else. Of course, the only tax deduction more well known than donating to charity is deducting mortgage interest on your home.
2. Deduct Your Medical Bills - This is wasteful advice for most taxpayers. The medical expenses deduction only applies to medical and dental bills that exceed 7.5% of your income. In other words, if your income is $100,000 and you have $8,000 in medical expenses, you only get a tax deduction for the amount of medical bills you paid over $7,500, or $500. Unless a family member had surgery or hospitalization during 2010, chances are your medical bills aren’t this high. Don’t bother gathering up all your medical receipts and EOB statements from the insurance company until you figure out what your medical deduction floor is.
3. Pay Your January Mortgage Payment In December – This is a good way to increase your tax deductions for THIS YEAR ONLY. By paying your January mortgage payment in December, you can deduct the mortgage interest on your 2010 taxes instead of waiting until 2011. That gives you 13 months worth of home loan interest deductions instead of 12 months. Good deal. But, you have to keep doing it every year from now on, or you will end up raising your taxes in the future, because the first year you don’t pay it early, you only have 11 months worth of payments to deduct that year.
4. Contribute to an IRA - Another good tax deduction. However, it doesn’t apply to high-income taxpayers with a retirement plan offered at work. Calculate if your IRA contribution is deductible first. If not, you are better off contributing to a Roth IRA if you can.
5. Contribute to 401(k) Plans – Nothing wrong with this way to lower your taxes. However, you can only contribute pre-tax dollars to a 401k via salary reduction, and you can only raise that amount so high depending upon your plan. There may also be a lag in when it goes into effect. This is more of a longer-term tax planning move. If you can change your withholding right away to take effect on pay checks before year end, then go for it. Otherwise, you are just making your January paycheck smaller. Unlike IRA contributions, you can’t deduct 401(k) contributions until April 15th.
6. Deduct Job Hunting Expenses - With high unemployment and many people having been out of work during 2010, this is a nice topical tax deduction. Just one catch. Like medical expenses, job hunting expenses have a floor. You can only deduct job search expenses that exceed 2% of your income. (Actually, this is the floor for the total of all miscellaneous deductions, so if you have other work related expenses, it might be more usable.)
7. Deduct Moving Expenses – Also subject to the 2 percent miscellaneous deduction floor.
8. Deduct Internet Access, Phone Bills, Cell Phones – Unless your employers requires you to have these as a condition of employment and does not reimburse you, you cannot deduct phone bills or monthly internet charges. Notice that “requires as condition of employment,” is not the same thing as, “need it to work from home.” Even if you meet the criteria, keep in mind that, technically, if you use it to surf the web, play games, download music, call your wife, friends, or kids, or anything else personal, then you also cannot deduct it as solely for business.
9. Unreimbursed Business Expenses – Again, these must be “required” and not paid for by your employer. If you have to drive to a meeting at another office and your employer does not reimburse mileage, then you can deduct the miles driven using the IRS 2010 mileage rate. You can never deduct the cost of commuting back and forth between your home and employer.
10. Generate Capital Losses – There is a right way and a wrong way to generate capital loss deductions. We’ll cover it in a future post, but suffice to say, you shouldn’t put tax decisions above investment decisions. Don’t forget about the IRS wash sale rule, which prohibits selling and re-buying a stock or other investment within 30 days and deducting the loss.

No related posts.

Lower Your Taxes – Increase Tax Deductions 2010 originally published at Finance Gourmet

One of the most effective ways for typical households to lower their tax bill is by donating items to charities. Unlike cash donations, donating used goods to charity is a free way to reduce the income taxes you pay. A quick trip to the basement or storage closet could turn up several trash bags worth of used clothing that no longer fits your children, or you. Other items like shirts, pants, suits, jackets, shoes and more may just be out of style, or no longer fit your current dressing manner.

For example, workers who used to have to wear a suit and tie to the office may now work in a business casual environment. Unless you live on the East Coast, suit and tie occasions don’t come up all that often. Hold onto one dark suite for funerals and formal weddings, and one less formal suit for other semi-formal events. Even clinging onto one fun suit, or stylish suit that you "might" wear to "something" someday can still leave you with a dozen suits that can be donated to local charities. Keep track of everything you donate with "contemporaneous records." Take the receipt from the charity and fill it out right away, but also keep a log in a notebook or a note card of everything you donate.

If you haven’t cleaned out your basement or storage unit in the last few years, there might be TONS of used clothing in there that you can donate. Don’t be afraid to donate it all and claim every last penny on your income taxes. Again, just keep very good records of exactly what you donated and when. Back up the charity’s receipt with your own logs, and, for extra measure, take some digital photos of the clothing. There is no need to capture itemized pictures, a few pics of a giant clothing pile and maybe one or two of the twenty bags being dropped off at Goodwill should be more than enough proof to head off any challenge regarding how much you donated. (How much you valued each item at, is a different story, which will cover next year when we talk about how to prepare your 2009 Federal Income Taxes.)

Don’t stop at clothing. Small appliances (think anything that could be used in a dorm room or small apartment), electronics, sporting goods, and more can all be donated to charities that would gladly accept them.

As an added tip, break up your donations by dropping them off over several days, or donating a portion of your used goods to various different charities. The IRS requires additional documentation for single donations that exceed $400. Keep each donation under that amount, and relive the extra burden of documenting larger charitable donations.

With many charities having one of their worst year ever raising money for good causes, now is the time to pitch in and help out. By donating unwanted items that are laying around your house, you not only help good causes that you believe in, you can also make some money and save on your taxes next year at the same time. Plus, you house will be cleaner, and you might actually be able to find some of those important things that are lost in your storage areas.

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No related posts.

End Of Year Tax Tips – Save Money On Taxes By Donating Clothing and More originally published at Finance Gourmet

You wanted something more amazing didn’t you.  So do most people, which is why they buy books and magazines and secret kits and then pay the same amount of taxes as they did last year.

This year try something different.  Just save more receipts.  When it comes time to file your taxes you won’t use any more lines on the tax forms for deductions, but you will be able to have higher numbers on the lines that you already use.

A Smaller Tax Bill

Wait ‘til next year.  The most often used phrase in sports may also be used by many taxpayers this week as the stress and shock of filing federal income taxes wears off.  Whether it was having to write the IRS a big check, or if it was seeing how your tax bill compared to others, or if it was just seeing the enormous number that you earned but never got to see thanks to paycheck withholding, it’s common to want to pay less taxes next year.

Paying less taxes is a goal that most Americans have.  Yet, it is a goal that most of us fail at.  The problem is two-fold.  First, life happens.  We get busy, we have other concerns, and pretty soon, the amount of money being sucked out of our paychecks each week or each month fades into the background noise until early next year, when once again, we are forced to remember how much money we lose each pay period to taxes.

The second problem is that even when we do manage to take action, it is often the wrong action.  Huge books line the shelves at libraries and bookstores offering children’s fantasies to pay zero taxes, or to cut your tax bill in half.  Others, simply promise to give you all the knowledge of a CPA or an MBA in 21 days, or whatever.  The truth is that the answer to lower taxes does not lie inside the thick books, nor in some unknown trick carefully hidden in the dark shadows of finance and tax law.

The Tax Secrets Myth

Every year, literally millions of people examine the tax code, tax laws, and all of the tax changes to find ways to save money for themselves or their clients on taxes.  Their findings are not kept a secret.  Instead, they are propagated through advertising, publishing, and numerous other methods.  However, it is in some people’s interest to continue spreading the myth that their are tax secrets, that you are a sucker who pays too much because you don’t know them, and if you would just buy their book, their kit, their package, their subscription, their service, their whatever, you too could pay zero taxes!  As you can imagine, every one of these people has something to sell you.

Here is the little known truth about income taxes.  Payroll taxes are virtually impossible to lower in any meaningful way.

Shocked? Don’t believe me?

Grab any tax tricks book, website, or article you want.  Start reading.  You will see all kinds of ways to do things about lowering your taxes, but look closer.  You have to have something else first.

1035 Exchange?  It’s great, but it only works on real estate.

A deduction you’ve never heard of before?  Do you have to have a small business first? Or, does it have to be a certain percentage of your income before it counts?

Trusts?  Works on assets, but not paychecks.

Off-shore accounts? Ditto.

What does work?  The usual.  Home mortgage interest, property taxes, state & local taxes, child care, child tax credit, student loan interest, tuition, capital losses/gains, dividends, IRA contributions, and charitable gifts.

Medical bills work, but only if they are at least 7.5% of your income, and then there are a bunch of miscellaneous deductions.  These are the ones that people love to tell about that are “secrets”. 

The truth is even if you tried to get every one, they probably would still have no impact on how much taxes you pay because they don’t count until they exceed 2% of your income.  Did you subscribe to enough magazines, buy enough tax software,  and drive to enough seminars to add up to 2% of your income?

Most people don’t.  That is why they don’t know about those deductions.  They don’t apply to them.

Which Deductions Can Normal People Get

When it comes to taxes, there is a standard list of tax deductions that are likely to apply to most people.  Everything else is a specialized gimmie to a special interest group, or a political ploy to appeal to certain voters.  In others words, it isn’t for you, and getting one of those deductions is likely to cost you more than you would save.  Your best bet tax-wise is to not worry about these “secret” deductions. 

If you are afraid that you won’t get one of the special tax deductions when you qualify, don’t worry.  Someone will tell you.  Someone will be so eager to tell you that you’ll know about it before you have even thought about any tax implications.  Why?  Because every finance or transaction professional in the world wants to have your business and they all have been repeatedly told that saving you money on taxes makes their service more valuable.  So, when you go to sell a piece of real estate that might qualify for a 1035 Exchange (your home does not), trust me when I tell you that the real estate agent, the loan officer, and probably even the people at your bank will bring it up.

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Related posts:

1. End Of Year Tax Tips – Save Money On Taxes By Donating Clothing and More
2. How To Deduct Property Taxes

How To Pay Less Taxes Next Year originally published at Finance Gourmet

IRS 2009 Standard Mileage Rate

Every year, the IRS sets the “optional standard mileage rates” that can be used to calculate the deductible cost of driving an automobile.

Contrary to popular belief, this number in no way legally binds anyone to paying this amount to reimburse you expenses you incur while driving your vehicle.  Most companies voluntarily use the same standard as it makes it easier to defend to employees (Hey, don’t look at us, the IRS sets the rate) and also because then the amount matches up if they ever have to defend the deduction they take for such a reimbursement. 

The new 2009 IRS Standard Mileage Rate is:

• 55 cents per mile for business miles driven
• 24 cents per mile for medical or moving purpose miles
• 14 cents per mile for charitable purpose miles

The charitable mileage rate isn’t actually set by the IRS, it is codified in law, so it hasn’t changed from 2008 and won’t unless Congress passes a law changing the rate.

Mid-Year Mileage Rate Change

Last year, the IRS adjusted the reimbursement rate in mid-year due to higher gasoline prices.  There is no requirement that they do so this year.

More Than Gas

One thing to always keep in mind, is that the mileage rate is not meant to cover the amount spent on gas.  While gas prices are a significant factor in the number, the mileage rate is also intended to account for wear and tear and depreciation of the automobile.

More IRS 2009 numbers coming soon.  Grab the RSS Feed to keep up to speed.

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2009 Tax Tips originally published at Finance Gourmet