The 529 plan is a tax-advantaged college savings plan. Of course, like all plans that offer IRS sanctioned tax savings, there are rules and regulations regarding just how and when a 529 plan may be used. One of these limitations involves how much money you can contribute to a 529 plan in 2012.

Head over here if you are looking for how a 529 plan works.

2012 529 Contribution Limits

Unlike IRA plans, where there are new 2012 IRA contribution limits, or other child tax credits, there is no income limits for 529 plans. That means that you can contribute to a 529 plan regardless of whether you are a high-income taxpayer or not.

There are, however, still a few kinds of contribution limitations for IRA accounts that you want to be aware of.

The first 529 plan contribution limit comes from the plan itself. Since 529 plans are administered by each of the 50 states, there can be 50 different plan rules. For each plan, there may be both an annual contribution limit and a lifetime contribution limit. In addition, for states that offer a state income tax deduction for 529 plan contributions, there may be a limitation on how much of each year’s contribution may be deducted.

For example, the State of Colorado has no annual contribution limit, but restricts contributions to a Colorado 529 plan once the account balance hits $280,000. On the other hand, California 529 plans allow contributions until the account balance is $350,000.

For some taxpayers, the most important 529 plan contribution limitation isn’t actually a 529 plan limit at all. IRS rules state that contributions to a 529 plan are a gift. Therefore, to avoid triggering potential gift tax implications, contributions must be limited to under $13,000 each year, which is the 2012 gift tax limit. A married filing joint couple can contribute up to $26,000 per year, which is considered one $13,000 gift from each person.

Special Gift Tax Rule for 529 Plans

There is a special rule for 529 plans regarding gift taxes. Up to five years of gifts can be made in advance to a 529 plan without triggering any estate tax or gift tax implications. In other words, a single person can contribute up to $65,000 in a single year to an individual’s 529 plan. However, such a contribution is considered an advance on future year’s gifts. Therefore, if one contributes the full $65,000 into a 529 plan, then no additional gifts may be made for five years.

Again, a spouse may contribute the full gift amount as well. In this case, a married couple that files jointly could contribute $130,000 in a single year to a 529 plan as long as they did not make any additional gifts to that same person for the next five years.

Related posts:

1. 2012 IRA Contribution Limits
2. Last Minute Tax Tip – Make Your 2008 IRA Contribution Now

529 Contribution Limits 2012 originally published at Personal Finance Blog - FinanceGourmet.com

The IRS tax tables for 2012, for use in filing 2012 taxes by April 2013, will be published in the fall of 2012.

However, the estimated tax withholding tables give an accurate assessment of how the 2012 tax tables from the IRS will look. Note that these 2012 tax bracket tables are no to be used for calculating your 2011 taxes that you file before April 2012, but rather for the tax year from January 2012 to December 2012. Those taxes will be filed in 2013, but estimated tax payments calculated throughout the 2012 year should use these IRS tables.

The 2012 standard deduction amount is the same.

2012 Estimated Tax Tables

If your 2012 filing status will be Single then your tax rate for estimated payments is:

• Income under $8,700 = 10%
• Income over $8,700 but under $35,350 = $870 + 15% of amount over $8,700
• Income over $35,350 but under $86,650 = $4,867.50 + 25% of amount over $35,350
• Income over $86,650 but under $178,650 = $17,442.50 + 28% of amount over $85,650
• Income over $178,650 but under $388,350 = $43,482.50 + 33% of amount over $178,650
• Income over $388,350 = $112,638.50 + 35% of amount over $388,350

If your 2012 filing status will be Married Filing Jointly then your tax rate for estimated payments is:

• Income under $17,400= 10%
• Income over $17,400 but under $70,700 = $1,740 + 15% of amount over $8,700
• Income over $70,700 but under $142,700 = $9,735 + 25% of amount over $35,350
• Income over $142,700 but under $217,450 = $27,735 + 28% of amount over $85,650
• Income over $217,450 but under $388,350 = $48,665 + 33% of amount over $178,650
• Income over $388,350 = $105,062 + 35% of amount over $388,350

Remember that whenever you are required to make estimated tax payments there is a general rule provision that you can use instead of calculating your estimated payments with the EST tax tables. The IRS decrees that if you pay 100 percent of the amount of taxes you paid the previous year, then you will not be subject to underwithholding penalties.

However, this does not mean that you will not owe taxes. Your tax rate will still be calculated based upon your actual income for the year. What it does mean is that you can make smaller quarterly estimated tax payments without being penalized for underpayment. You do need to be sure that you will be able to make your tax payment the following spring when you file your taxes, or you may be subject to interest and penalties at that point.

For higher incomes, those with an adjusted gross income (AGI) above 150,000, the general rule requires that your estimated tax payments equal 110 percent of your previous year’s taxes to avoid paying an under withholding penalty.

Other 2012 tax tips and advice is available here on Finance Gourmet.

Related posts:

1. Tax Due Date 2012
2. 2012 Standard Deduction Amount Set

2012 Tax Tables originally published at Personal Finance Blog - FinanceGourmet.com

Taxes for 2011 are almost due. As always, the IRS tax filing deadline for 2012 is April 15th, only it isn’t.

April 15th is a Sunday and taxes are not due on weekends, especially Sundays. You don’t expect government bureaucrats to work on the weekend, do you? Not to mention, you can’t get a postmark on Sunday because the Post Office is closed.

So, your taxes should be due on April 16th, but they aren’t due then either.

Just like last year, the Monday your taxes would normally be due on is a holiday. It isn’t a Federal holiday, but it is a holiday in Washington D.C. and when it comes to the Internal Revenue Service, the holiday schedule includes those D.C. holidays.

After all of that, it comes down to for 2012 taxes are due on Tuesday April 17th. Technically, of course, that means that your taxes must be postmarked by midnight April 17th. As always, there will be certain post offices open late, some until midnight, where you can mail your taxes right up to the deadline and still get that all important postmark.

If you don’t file your taxes on time, you’ll owe penalties and interest. If you don’t pay your taxes, it’s the same story. Don’t forget, though that you can get a free, no questions asked, automatic filing extension just by filling out the form and mailing it in by the same due date as your regular income taxes. So mail your 2011 tax return or your extension request by April 17, 2012.

Related posts:

1. 2012 Standard Deduction Amount Set
2. 2012 IRA Contribution Limits

Tax Due Date 2012 originally published at Personal Finance Blog - FinanceGourmet.com

Doing income taxes can be a trying time for many taxpayers. There are numerous forms to fill out, cumbersome calculations to perform, not to mention, the rules change every year. When you finally finish, you might end up owing a lot of taxes to the government. The IRS isn’t know for being forgiving, but that doesn’t stop people from wondering, what happens if I don’t pay my taxes?

Failure to File Taxes

First, it is important to distinguish between not filing your income taxes, failure to file, from not paying your income taxes. There are significant additional penalties for not filing your income taxes on time. If you can pay your taxes, but can’t get them done on time, then consider filing a Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax. Filing this form grants taxpayers an automatic extension of time to file. This form must be filed by the April 15th filing deadline just like a regular tax return would be. Once filed, the new deadline for filing your taxes moves to the beginning of October.

Beware, even if you file for an extension, you do NOT get any additional time to pay your income taxes. Just because you haven’t submitted the forms doesn’t mean the taxes aren’t due. You have to estimate how much you will owe and send the IRS a check. Keep in mind that penalties and interest for not paying your taxes are percentage based, so even if you are off in your estimate, submitting a payment will lower any potential charges. If you are expecting a refund, there is no need to send any additional payment with your extension request.

Failure to Pay Taxes

One of the first questions asked is often, “Can the IRS send me to jail if I don’t pay my taxes?”

Technically, the IRS cannot send you to jail. However, a judge can order you to serve jail time for failure to pay income taxes. However, this is not a common occurrence. The IRS actually has many other remedies at its disposal that it uses instead. After all, sending someone to jail doesn’t bring any money in to the government.

If you don’t pay your taxes on time, the IRS will begin charging you penalties and interest. The interest rat the IRS charges is set on a quarterly basis and is equal to the federal short-term rate plus 3 percent. In addition, there is a late payment fee of 1/2 of one percent of the amount owed for each month that it is owed, up to a maximum 25 percent penalty.

If you do not pay, the IRS will eventually begin what are called enforcement actions. There are a wide range of possible actions. The most common are an IRS levy and garnishments. With a levy, the IRS takes money or property that you own in order to settle your tax debt. A garnishment occurs when the IRS intercepts payments (typically a paycheck) before they are made to you.

The most common IRS levy is made against any tax refunds you might have. It goes without saying that the IRS will take any tax refund you are due in future years to pay off any unpaid prior year taxes. In addition, the IRS will also intercept any state income tax refund you might be due. A notice of levy will be sent to the taxpayer before each event.

Stopping IRS Levy or Garnishment

It is surprisingly simple to stop IRS enforcement actions such as a levy or garnishment. The IRS offers most taxpayers, who are delinquent for a single tax period, the ability to enter into a payment plan with the IRS. Although not required, the IRS typically stops all enforcement actions once a payment plan has been filed.

You can request a payment plan online and be informed immediately if your plan has been accepted. The monthly payment requirements can be relatively low. A $100 per month payment may be accepted for tax due amounts over $5,000 or more.

Although the interest charged for paying late does not stop, the penalty is reduced from one-half of one percent to one-quarter of one percent. Still, it is in your best financial interest to pay down your balance as quickly as possible to lower these fees. However, keep in mind that additional payments DO NOT pre-pay your installment agreement. That means if you agree to pay $100 a month and then you send in an extra $500, you still have to make next month’s $100 payment. You do not get credit for five months worth of payments.

There is a fee to setup a payment agreement and the consequences for failing to follow through on such an agreement can get nasty quickly since you have now not only failed to pay your taxes, but failed to honor your installment agreement as well.

Use the online installment agreement tool and choose the lowest amount possible, even if you can pay more. You can always send in extra money if you have it, but you won’t be stuck with a too high payment later if something goes wrong.

Related posts:

1. How To Deduct Property Taxes
2. Taxes Not Due Today – April 18 not 15

What Happens If I Don’t Pay My Taxes originally published at Personal Finance Blog - FinanceGourmet.com

TurboTax is a popular tax filing software package. There are several versions ranging from a free online basic TurboTax edition to a Home and Business TurboTax and more. They all in work in pretty much the same way. The software guides the user through a bunch of fill in the blank entry screens and does all the math and complicated tax worksheets automatically behind the scenes.

For a great many Americans, using TurboTax software is just as good as paying an accountant to file taxes.

Turbo Tax Refund Card

At the end of the Turbo Tax filing process, the software offers users the ability to get their tax refund via a prepaid Visa card. Unlike the Rapid Refund scams of years gone by, there is no promise of a faster refund, and the refund card is not actually a loan against your actual refund. That being said, the whole thing borders on being a TurboTax Refund Card scam.

Like all legitimate businesses, Intuit, maker of TurboTax, covers itself in a sea of fine print and disclosures buried deep beneath the suggestion that this refund method is actually advantageous for the taxpayer filing their taxes. So, technically, everything is on the up and up. However, chances are you’ll be better getting your refund a different way.

First up, is the news that you can get your refund fast, in some cases, the IRS direct deposits the money to your card in as little as 7 days. If you are paying attention, this is the exact same time frame for getting your refund direct deposit into your actual bank account instead of on the Turbo Tax Refund Card. In other words, there is no speed benefit to the card unless you were planning to ask the IRS to mail you a check.

Despite the Visa logo on the card, there is no credit card feature to the refund card. Rather, the card is the same thing as a prepaid Visa card. For those of you who don’t have much experience with prepaid credit cards, it works the same as a debit card only instead of being attached to a checking or savings account at your bank, funds are attached to the card itself. It is very much like a gift card with a prepaid amount on it. The difference is that you can refill it.

Many merchants have similar setups. I have a Starbucks card that works just like this, only it doesn’t have the sneaky fees that push this card from being a legit card to being very close to being a scam.

TurboTax Refund Card Fees

Of course, the devil is in the details. In this case, the devil is in all the fees for the TurboTax Refund card.  The first month you have the TurboTax Visa Refund card, there is no monthly charge. After that, there is a monthly fee of $5.95 per month, unless you keep the balance on the card above $50. That means that you don’t want to be using this card to pay for small purchases over a long period of time.

Next up is the fee for cash withdrawals. Using an ATM to get cash from your TurboTax card will cost you $2.50 plus whatever fee the ATM itself charges. It even costs 50 cents to do a balance inquiry through an ATM, although they are free online or via phone or text. You do get ONE free withdrawal each month, but it has to be at an AllPoint network ATM, so check those labels closely.

There is a $4.95 fee to replace a lost or stolen card and if you decide to reload the card with money, that will cost you $4.95 too. You can avoid the fee by using direct deposit.

Is Turbo Tax Refund Card Worth It?

If you already have a bank account, just have your refund direct deposited into your checking account. It will be just as fast as having it sent to a Turbo Tax card, and chances are you already have plenty of ways to access your money ranging from an existing debit card, to checks, ATM cards, and even teller withdrawals, all without having to worry about tripping over any additional fees or expenses.

If you do not have a bank account, the TurboTax Refund Card will get you your refund faster. However, be sure to use up all the money within the first month or keep your balance above $50. Another option is to withdraw the whole amount in one ATM transaction. That first one is free, but remember there is a daily limit to how much you can withdraw. If it will take you two withdrawals (or more) to get all of your cash, be sure to leave at least $50 on the card to avoid the monthly charge. Otherwise, your refund could disappear quickly in a sea of fees.

If the money isn’t burning a hole in your pocket, consider just waiting for the check.

See the official company information here.

Related posts:

1. Printing Tax Returns TurboTax or TaxCut
2. Free TurboTax Software Online – Deals on Tax Programs

TurboTax Refund Card Review originally published at Personal Finance Blog - FinanceGourmet.com

The following is a guest post from Michael at Credit Card Forum.

Yep, it’s that dreaded time of year again… tax time! And if you’re a small business owner, the process of doing taxes is especially arduous. Not only do you have to categorize all the business-related expenses from last year, but you also have to figure out the proper way to deduct them. So when it comes to interest, what does the IRS have to say about it?

Well first of all, let me start out by saying I am not a tax professional. Therefore the information that follows is not tax guidance, nor is it professional advice. Please consult an accountant or tax attorney for that.

Rather, I’m only coming to you as a real-life business owner. I have been 100% self-employed for the past couple years and before that, partially self-employed. So I know firsthand the headache and confusion of dealing with this issue.

What does the IRS say?

On the IRS website, you will find the “Tax Guide For Small Business” and Chapter 8 specifically addresses the deduction of interest. They start out by saying:

“You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your business.”

This is a pretty clear statement, except having the word “generally” in there definitely leaves it a bit vague. This is why you have to keep reading…

“Interest relates to your business if you use the proceeds of the loan for a business expense.”

Read that sentence twice. You need to make sure the proceeds of the loan (or credit card) are going directly towards the qualifying business expense(s). That will seem like common sense to most people, but I had a friend who erroneously believed he could deduct his student loan interest because the education would help him run his business. Sorry, but semi-related scenarios like that will not qualify.

As a rule of thumb, if the expense in question isn’t included in your business deductions, then it’s safe to say any interest you incurred from it won’t qualify, either.

The IRS also sets out 3 specific requirements which must be met in order to deduct business-related interest:

1. “You are legally liable for that debt.”

So if the debt was guaranteed by say, your mother’s credit instead of you/your business entity’s credit, then it doesn’t meet this requirement.

That being said, if a formal debtor-creditor relationship was established between you and your mother (to make you liable) then perhaps there might be a way to make it work, but you will need to consult a tax professional to find out whether or not that’s possible.

2. Both you and the lender intend that the debt be repaid.

If you have a loan from a bank or owe money on a business credit card, then of course the lender expects you to repay them. However if there are circumstances where your debt might be forgiven, then it probably wouldn’t pass this requirement.

3. You and the lender have a true debtor-creditor relationship.

Without a doubt this is one of the biggest mistakes I hear small business owners make. They think that if they informally borrow $5,000 from Mary Sue and Uncle Bob, it counts as a loan… it won’t. Consult with a tax professional as to whether you have a “true debtor-creditor relationship” with the other party, but be aware that some of the things it must include will be a repayment schedule, maturity date, and default provisions (and of course interest charges). Not all promissory notes have those components.

How is the interest deducted?

There are many rules, so to summarize them in a few paragraphs wouldn’t be possible. Please reference Publication 535 from the IRS (chapter 4 is about interest). The most recent version can be found here. At the time of writing, if you open the PDF version of Publication 535 and turn to page 11, it will be the start of the section about interest and how to allocate it under different circumstances.

About The Author: Michael runs an online business, Credit Card Forum. There you will find an extensive section he has written about choosing the best business credit card.

Related posts:

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2. More Tax Deductions for Small Business Owners and Sole-Proprietorships

What Does The IRS Say About Deducting Business Related Interest? originally published at Personal Finance Blog - FinanceGourmet.com

Yea! Just got news that Congress decided not to kill off the fragile economic recovery in the U.S., well, not yet at least. Congress has passed legislation that extends the payroll tax cut through the entire year.

The tax cut was a 2 percent reduction in the amount of Social Security tax paid by workers. The employer part of the social security tax (and therefore a significant part of the self-employment tax) was not cut. However, this tax cut put additional money in the pockets of households across America. Letting it expire and seeing what happens when people suddenly realize their paycheck is smaller than they are used to would have been a big problem.

Virtually every respected economist in the world warned that failure to extend this particular tax cut would have a big impact on the U.S. economy, perhaps causing the tepid growth to teeter, or plunge all the way back into recession.

I’ll be back later with more details once I have a chance to comb through the actually bill on its way to President Obama’s desk.

Related posts:

1. FDIC Insurance Limit Increase Extended
2. 2011 Section 179 Deduction Limits for Small Businesses Taxes

Payroll Tax Cut Extended originally published at Personal Finance Blog - FinanceGourmet.com

As tax season approaches, America’s thoughts turn to the required filing of income taxes. Theoretically, America’s tax system is a voluntary reporting system, however, that voluntary part is backed up by a pretty big stick, IRS audits.

Odds of Being Audited

According to IRS statistics, the chances of being audited by the IRS is about one in 100, or one percent. A deeper look, however, reveals the the IRS audits certain tax returns much more often than other returns. IRS audit statistics suggest that high-income taxpayers and those who own small businesses are more likely to be audited that middle and low income taxpayers who earn the majority of their income from wages and salary or brokerage-style investments.

The reasons certain groups get audited more than others are two-fold. First, and foremost, there is more money to be gained by auditing higher income taxpayers. For example, consider a middle income wage earner, who is married filing jointly, bringing down a salary of $70,000 with no other income. Taking the standard deduction for 2011, of $11,600 for married couples filing joint, that leaves $58,400 of taxable income.

Do the math and that taxpayer isn’t going to pay any more than around $7,500 and likely much less if there are any kids. Assuming that our fearless taxpayer files his income taxes and fudges a child care credit or student loan interest deduction, he might shave a few hundred bucks off his total. If he is caught and audited, then the IRS can recover that and penalties and interest (particularly if it is proven to be fraudulent). Either way, the sum total of collection by that IRS audit won’t be more than a $1,000. That’s hardly worth the time and effort.

Don’t get me wrong, the IRS can and does audit returns like this all the time, primarily to avoid the appearance of “never” auditing certain kinds of tax returns. All it takes is one person getting audited to scare-straight dozens of their friends and acquaintances. However, at the end of the day, this taxpayer isn’t really “worth” the cost of an audit.

Who Gets Audited By the IRS?

A high-income taxpayer on the other hand can generate a significant tax recovery. When someone’s total tax liability is $5,000, even a big cheater won’t owe too much extra if audited. However, when someone’s total tax liability is $25,000, $50,000 or more, a successful audit might recover $10,000 or more, especially if there are penalties and interest involved.

The other reason higher earning taxpayers get audited more often is that they have more ways to cheat. Someone who earns a salary and takes the standard deduction has very little room to be sneaky. After all, their salary is reported to the IRS as well as the taxpayer. Trying to cheat on that number is flat-out stupid, considering a computer will crosscheck each and every one of those.

On the other hand, higher salaried taxpayers tend to itemize their deductions. Many of those tax deductions, such as mortgage interest are also reported to the IRS and thus not likely to be underreported. However, there are plenty of deductions that can be exaggerated very easily. Catching these things is the bread and butter of audits.

For the same reason, small business owners are frequent audit targets. There are many deductions for small business owners and other than the requirement to keep receipts and records, many are completely undocumented directly to the IRS. The 2011 Section 179 tax deduction alone is worth up to $250,000 this year. That’s some real money worth collecting.

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1. Mortgage Tax Deduction End of Year
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IRS Audit Odds originally published at Personal Finance Blog - FinanceGourmet.com

While there is never a good time to file bankruptcy, there are some things that make filing bankruptcy at a certain time more or less advantageous for the filer. Making sure you understand the various bankruptcy rules and timing a bankruptcy filing correctly can save you some time and money.

Good Time to File Bankruptcy

One of the things that trips many bankruptcy filers up, even after speaking with a bankruptcy attorney, is that the bankruptcy court will take 40 percent of your unpaid earnings. If you get paid once per month, this can be a very big deal. For example, if you get paid on the 30th of each month and you file your bankruptcy petition with the court on the 28th, you will have to pay almost half the amount of your pay check to the bankruptcy trustee. In a case like this, you would be much better off waiting the following month to file for bankruptcy.

However, there is a catch. You don’t want to file too soon after being paid because the other thing that the bankruptcy court is entitled to is almost all of the cash in your bank accounts on the day you file. For example, if you got paid $3,000 on the 30th and then you filed your bankruptcy petition on the 1st and there was $2,900 left in your bank account, you’ll have to pay that $2,900 to the trustee, even if you have long since spent it since you filed. Don’t forget, the numbers that matter are the ones that exist on the day you file.

Which brings us to the next issue in bankruptcy filing timing. Spend your money before you file. Be careful HOW you spend your money. Buying “things” like jewelry or other items is a very bad idea. The court can ask you to forfeit those items, especially if you bought them close to the filing date or if those items exceed the amount of allowable bankruptcy exemptions in your state. However, buying groceries, filling prescriptions and making sure your gas tank is full are very good ways to spend your money down before filing bankruptcy. No one can complain that you want to eat and stay healthy. More to the point, there is really no way to ask you to forfeit food, gas, and medicines.

Be very sure you understand that the amount in your account on the day you file is what matters, not when you spent the money. For example, if you write a check for $200 worth of groceries on the 8th, file bankruptcy on the 9th and the check clears on the 10th, the amount of money that counts against you for the purposes of asset counting in your bankruptcy is the amount in your checking account on the 9th, which includes the $250 you already spent. For this reason, it can be useful to withdraw cash. However, large cash withdrawals right before filing can be suspicious. Keep all your receipts to prove that you spent that money on necessities. You can also use your checking account debit card instead. Debit card transactions often clear in 24 hours, so you just have to wait one day. However, be careful of weekends and bank holidays when transactions may be delayed in reporting. You can also simply time your filing for a time after your checks and debit card transactions have cleared.

If you file anytime between December and April, don’t be surprised if your bankruptcy trustee keeps your case open long enough to take any tax refund you are getting. Don’t try spending your refund right before filing either, that usually won’t fly. Either adjust your withholding to avoid a refund (late in the year). If you still owe taxes from the previous year, this doesn’t apply to you. The IRS will intercept any refund before it ever goes to you and apply it to your outstanding taxes, before the court can lay any claim to it. This works in your favor since most federal income taxes cannot be discharged in bankruptcy.

Pay Bills Before Bankruptcy

It doesn’t make sense to pay bills due on credit cards before filing. Those debts, including any late fees, will be wiped out in the discharge. As far as your credit score goes, bankruptcy is bankruptcy. Your credit report won’t look any better if you have slightly lower balances on your credit cards before you file. You might want to take a look at your credit score before you file. To avoid having to pay, get a free credit score from CreditKarma.com. (See my Credit Karma scam article and my CreditKarma.com review article for more details.) You may, however, want to wait to sign up for Credit Karma free credit monitoring. You’ll just get a lot of depressing emails as everyone reports your bankruptcy and charge offs.

While it is not smart to pay bills like credit card bills, it is very smart to pay utilities and other bills. Paying those bills takes money out of your accounts in a way that cannot be reclaimed by the bankruptcy courts. So, in our example above, the best time to file for bankruptcy is soon after you get paid, but not until you have paid your electric bill, cable bill, cell phone bills, kid’s tuition or day care fees, and so on. Each of those things will reduce the amount of cash you have to report without raising any white flags. In order to keep the amount of unpaid earnings you have to pay to the court low, pay those bills in advance so that you can file soon after you get your paycheck before more unpaid earnings build up.

Grab the FinanceGourmet Feed to keep up to date on our series of bankruptcy filing help articles as well as our other personal finance tips.

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Best Time to File Bankruptcy originally published at Personal Finance Blog - FinanceGourmet.com

When you sell certain assets or investments that have appreciated in value, you may owe taxes on the increased value. The difference between what you paid for the investment and the amount you sold the investment is a capital gain and it is subject to capital gains taxes. However, if you lose money on an investment you can deduct the capital loss.

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 Personal Finance Blog - FinanceGourmet.com