Who doesn’t love tax deductions right? As a quick reminder, a tax deduction is an expense that you subtract from your total income; after taking all your deductions you’re left with your adjusted gross income or AGI. The lower your AGI, the lower the amount of taxes you will have to pay.

When its time to file your tax returns you’ll have to decide between taking the standard deduction or to file itemized deductions. Which way you decide depends on a number of factors but you have to chose just one.

Some Deduction Rules

• Eligibility: To be eligible for the standard deduction you must be a U.S. Citizen or resident alien, non resident aliens cannot use the standard deduction.
• Filing Status: If you are married and filing separately you cannot mix and match, if one party itemizes, both parties must itemize or one must claim zero as the standard deduction.
• You can decide to use the deduction method that results in the least amount tax owed.
• Itemizers must use IRS Form 1040 and complete form Schedule A. If you claim the standard deductions you can use IRS Form 1040A or 1040EZ

Itemized Deductions

You should have documentation as evidence to support each item that you are attempting to deduct. If you cannot support your tax deduction claims then you risk running into IRS problems if they ever decide to do a tax audit.

In order to accurately itemize your tax deductions you should be saving receipts from all of your allowable itemized deductions for the year. Here are some of the types of expenses that can be used to calculate itemized deductions:

• Medical expenses that are greater than 7.5% of the taxpayers adjusted gross income – medical tax deductions
• State and local taxes including property, sales and income taxes
• Some mortgage interest and home equity loan interest
• Investment interest
• Donations and charitable contributions

Standard Deduction

What exactly is the standard deduction? It’s a flat rate amount that is deducted from your total income to arrive at your AGI. The amount that can be deducted varies based on the your filing status. Here’s a standard deduction table from the last few years:

According to the IRS more taxpayers that file income tax returns choose the standard deduction amount over the itemized deduction amount. There are a few different reasons which might contribute to this:

• If you don’t have many qualifying expenses, the inflation adjusted standard deduction may be a bigger tax savings for you.
• Claiming the standard deduction means that you’re not burdened with knowing and with keeping track of every single qualifying expense throughout the year.
• If the standard and itemized deduction amounts are similar some people may choose the standard deduction so they won’t worry about the possibility of problems during an IRS audit.

Track Your Expenses

If you haven’t kept records of all your itemization expenses for the past year you might get some tax forms that could help you, like the form for mortgage interest paid on a loan. However it’s better to track your expenses yourself throughout the year. The only way to know for sure which method works out best for you is to keep records of your itemizable expenses during the year and then calculate both methods next tax season.

Tax refund loans, also known as refund anticipation loans or fast tax loans, can be a tempting option if you’re in need of money and expecting an IRS refund.  However, these tax refund loans can be a very expensive option due to the fees and interest charges that typically accompany them.

Refund Anticipation Loans

The official name of these loans is refund anticipation loans, or RALs. The Consumer Federation of America lumps RAL loans in with their more notorious cousin payday loans due to the high fees associated with them.

A February 2009 report indicated that RAL loans generated an estimated $900 million in fees from 8.67 million taxpayers who used them based on 2007 figures alone. These services promise your refund money immediately or in a few days (less fees and costs), but if you’re willing to wait an extra couple of weeks, the Internal Revenue Service will pay back your refund without fees or interest charges when you file IRS Form 8888 with your return.

The IRS option also makes it relatively simple to divert your refund into an IRA contribution or the purchase of U.S. Treasury securities or U.S. Savings Bonds.

Costs of Tax Refund Loans

In 2007, the Consumer Federation and the National Consumer Law Center reported that RALs cost the average borrower from about $30 to more than $125 in loan fees. Some tax preparers also charge separate fees on top of those amounts for the “application.”

In their study, both agencies reported that the effective annual interest rate (APR) for a RAL can range from about 40 percent to over 500 percent, and if application fees are charged and included in the calculation, the effective APRs range from about 57 percent to over 1,100 percent.

Tax Return Tips

The real point is that it’s important for you to try and plan your finances and tax strategy so that you’re hopefully not scrambling in need of a tax refund in April. Most financial planners will you that the best way to put cash in your hand is through tax planning, not overpayment of tax so you can get a check later.

Want to put extra money in your pocket all year round, not just at tax time? Consider the following steps:

Tax planning:

Qualified tax professionals such as certified public accountants (CPAs), enrolled agents (federally licensed individuals who have passed a comprehensive IRS exam) or a tax attorney can help you devise a strategy so you and Uncle Sam don’t owe each other anything at tax time.

You’ll do this through smart withholding and finding legal deductions that might create tax savings. Many individuals can get by with the help of an enrolled agent or CPA, and while there are many tax attorneys who do individual returns, they are typically used for business returns or more complex individual tax situations.

Restructure your spending:

Understanding your spending will prevent you from looking desperately for cash at other times. A financial planner can give you some critical advice in building a budget that fits you and your income and spending picture.

You can also buy a financial tracking program like Quicken and start typing in your daily spending (that could be a real eye-opener). Once you know what you’re spending, you can figure out how to afford essentials and extras in a way that will prevent a panicky search for money around tax time.

Make smart money choices:

Quit thinking about your refund as an excuse for a trip to Home Depot. Why not use an unexpected tax refund to fund an IRA or some other savings or investment vehicle? If you finish your taxes early enough you might be able to deposit that overage directly in those accounts. 

To help you understand why tax refunds call out to you to be spent check out the parts about mental accounting in the book “Why Smart People Make Big Money Mistakes”. If you understand the reasons why our brains like to use mental accounting it can help you overcome irrational money behavior and make better money choices.

The flexible spending account deadline is one that you don’t want to miss if you still have funds from last year in your FSA.  As you’re probably well aware, you lose any money left in your flexible spending account that’s not spent by the FSA deadline.

Flexible Spending Account Grace Period

A few years ago the IRS created a grace period so that you can spend money from your FSA into the first few months of the following year.  It seems like our family always uses this FSA extension, spending our money through the Spring of the next year.  It’s hard to forecast exactly how much money you’ll spend on qualifiying expenses for the entire next year so the grace period does offer a little flexibility in the whole FSA system.

Flexible Spending Account Contributions

If you underestimate what your medical expenses will be the upside is that you don’t leave any money sitting in your account at the end of the year; and the downside is that you pay tax on more of your income.  If you overestimate what you’ll spend then you pay tax on less of your income BUT you have money in your FSA account in danger of being lost. 

That’s where the grace period comes in handy, you can still spend your flexible spending account contributions into the following year.  Since we haven’t qualified for medical expense income tax deductions in years past we’ve tended to overestimate our FSA contributions to help bring down our income and then spent the remaining amount January & February of the next year.

Flexible Spending Account Deadline

The time has come this year, the deadline to spend your FSA money from last year is Monday. You earned that money so don’t let it go to waste!  Here are some flexible spending account strategies if you still have a lot of money left to spend. 

If you’re not sure if you still have money from last year, most FSA adminstrators allow you to access your balances by phone or online, so check them out today.  Spend what you can on eligible expenses this weekend and fax in your claim forms on Monday. You typically have until sometime in May to actually submit your reciepts but it’s better to send them in right away so you don’t forget.

H&R Block at Home is some of the best tax software available for consumers who want to prepare their own taxes.  I was able to ask Julie Markey, a Vice President at H&R Block, some questions about the software via email.  Julie’s the managing director of digital tax solutions so she’s very familiar with the software’s capabilities and features.  I asked her five questions about H&R Block at Home; hopefully her answers will help if you’re doing your taxes yourself and still trying to decide on tax prep software.

1) What are some of the most useful new features of H&R Block at Home?

Our software leverages H&R Block’s 55+ years of tax expertise to ensure taxpayers are getting the most of the tax credits and deductions available to them.  This year in particular, we have worked hard to simplify the language so it’s easy to understand no matter how complex your tax situation. 

The H&R Block At Home products  offer a personalized customer experience and a Smart Import service that allows for easy import of W-2 and 1099 data as well as prior year tax data from TaxCut® and TurboTax®.

2) If someone’s trying to pick the best version of H&R Block at Home for them, what are some of the things they should consider?

There are four different variations of H&R Block At Home – and each variation appeals to different taxpayers based on the complexity of their tax return:

1. Free and Basic for taxpayers who have very simple tax situations. 
2. Deluxe for those taxpayers who own homes or have investments.
3. Premium for those who are self-employed or have rental property.
4. Premium & Business for those who need to file personal taxes and also own their own businesses. 

That said, with H&R Block At Home products, taxpayers can access a tax professional for additional support.  And for DIY taxpayers who want even more confidence that their taxes were done correctly, our Best of Both offering allows the taxpayer to start his or her return online then hand it off to an H&R Block tax professional who will review the return, correct any errors if necessary and e-file the return.

3) H&R Block has been working with clients in person for a long time, how has that experience helped improve the H&R Block At Home tax software?

As the No. 1 retail tax preparer, H&R Block understands tax laws and wants to ensure DIY taxpayers know they’re receiving the benefit of more than 50 years of tax expertise and the ability to access tax professionals for additional assistance when they purchase an H&R Block At Home product. 

Because, we’ve been doing taxes for over 50 years, we understand more about the taxpayer, the tax code, and the tax preparation process than anyone. This year, we’ve honed our digital products to improve the experience for our customers  to help ensure them they are getting it right.

4) If someone is filing their taxes with your software for the first time what options do they have for support when they run into questions?

With H&R Block At Home, you get the support of real, experienced tax professionals, ready to help if you need it. It’s something no other do-it-yourself tax solution can offer. H&R Block At Home products include:

• Live tax advice from an H&R Block tax professional in case you get stuck or need extra help.
• Live chat support, so it’s there whenever you need it.
• Audit support with guidance, plus an H&R Block-enrolled agent to represent you in the event of an audit .

In addition, H&R Block launched the Get It Right community where 1,000 tax professionals answer tax questions for free online.

Questions can be submitted via computer or iPhone through the H&R Block Tax Answers App. Most will be answered within 24 hours. Tax calculators, an office locator and access to useful widgets and other tax preparation tools are also available through the Get It Right Community.

5) Which is the most popular version of H&R Block at Home?

H&R Block At Home Deluxe is the most purchased version as it is designed for taxpayers who own homes or have investments.

Thanks to Julie for taking the time to answer some questions about the H&R Block at Home tax prep software.  Stay tuned because we’ll be giving away a few copies of H&R Block at Home Deluxe version and the giveaway will start in the next few days.

Your medical expenses can be income tax deductions depending on how you file your taxes and how high your medical bills are. We all know that health care costs just keep going up, lets take a look at how you might be able to get tax deductions for these expenses.

Tax Deduction Requirements

In order to be able to claim medical expenses as income tax deductions, your health care costs for the past year must be greater than 7.5% of your adjusted gross income (line 38 of tax form 1040).  If you are eligible you can claim all of the covered expenses in excess of the 7.5% of adjusted gross income threshold.   The other requirement is that you have to itemize your deductions.  If you use form 1040 EZ and claim the standard deduction then you can’t deduct your medical expenses.

The idea behind using a percentage threshold as opposed to a dollar amount was to prevent wealthier tax payers from claiming expenses that they can actually afford while assisting less wealthy taxpayers who could get in serious financial trouble due to medical expenses.  Of course, 7.5% of your AGI is still a lot of money for most people so many of us won’t be able to claim these expenses as deductions.

If you are able to claim them, the expenses would are calculated and included on Schedule A of your tax returns, when filing IRS form 1040.

What Medical Expenses Can You Claim?

In the eyes of the Internal Revenue Service the term medical expenses should be thought of in more of a health care expenses frame of mind; meaning virtually any expenses that you incurred throughout the year to provide for the health of you, your spouse, your children and anyone else that would be considered your dependent for tax filing purposes.

Health care would include the costs for some health insurance coverages, dental care, eye care, as well as physical and mental health care costs. The list includes doctors’ visits, tests, surgery, therapies and medications. If it is not covered by your insurance and if you are not reimbursed for it, it can be claimed as one of your expenses. Essentially anything that is medically necessary to restore you to good health can be considered deductible medical expense, from abortions to x-rays.

Also included are things such as capital improvements to where you live like a wheelchair ramp, elevator or special bathroom fixtures. You can include medical expenses for transportation; to and from appointments, bus fare, cab fare, ambulances, as well as special modifications or equipment to make your vehicle handicap accessible.

Of course, there are things that you can not include when adding up your total medical expenses. For an understanding of what types of things cannot be included as deductible expenses you have to consider whether it is something that could be considered voluntary or cosmetic as opposed to medically necessary.

Simple examples of items that are not deductible would be: cosmetic surgeries, non-prescription treatments of any kind, health club memberships, hair transplants, maternity clothes, and funeral arrangements.

For a complete list and explanation of all the medical expenses that can and cannot be included check the U.S. Department of the Treasury, Internal Revenue Service, Publication 502.

Flexible Spending Accounts

One alternative to using medical expense deductions to offset your health care costs is to check if your employer offers a section 125 plan, frequently known as a flexible spending plan or cafeteria plan.

A flexible spending account (FSA) allows you to put a portion of your salary into a special account that can later be used to pay for medical expenses.  That money comes out of your salary pre-tax. This means that it lowers the total amount of your paycheck subject to federal income tax, and in doing so lowers your tax bill.

If you decide to use an FSA you have to carefully manage your receipts for medical expenses and submit them to the plan administrator, who reimburses you for qualified costs out of your FSA account balance.  Here are some tips for getting the most from your flexible spending account payments. 

The most important thing to remember is that you lose any unspent balance in your FSA at the end of the period so you need to estimate as closely as you can what your expenses will be in the coming year.  Since this is so difficult to do, the IRS now allows you to spend money from your FSA balance through the middle of March of the following year. Make sure that your FSA plan administrator offers this option in your flexible spending account.

How can you check on your IRS tax refund after you’ve filed your taxes and are waiting to get money back?  Below is a tax refund schedule from TaxACT that shows an approximation of when your refund check should be mailed or direct deposit put into your bank account based on the date range that you filed your taxes.

Where is Your Tax Refund?

There are two ways to get your tax refund, through direct deposit or as a paper check in the mail.  As you can see from the table above, you’ll get your refund much faster if you eFile and choose the direct deposit option.

Here are the general time frames that it takes for you to get your refund once the IRS recieves your tax return:

• Paper File – 6 Weeks
• eFile – 3 Weeks
• Amended Returns – 8 to 12 Weeks

If your refund is taking longer than expected it could be because you made a mis-calculation while computing figures on your tax form and that you may get less back than you’d expected or nothing at all.  Or you might have made an error on your tax return such as accidentally switching digits in your social security number or some other typo.

So how do you know if there was a problem with your return or if it’s just taking awhile to get your refund back? The IRS has a number of ways that you can check on the status of your tax refund.

Tracking Your Tax Refund

IRS Website

Regardless of whether you filed electronically or not, you can use the IRS website to check the status of your refund.  The IRS has a tool called Where’s My Refund? that asks for your social security number, filing status, and the refund amount from your tax return.

If your refund has already been sent, you’ll get back the date it was mailed or deposited into your account.  If it hasn’t then the IRS will basically just tell you that they got return and are still working on it.  If they already tried to mail you the refund but it came back undeliverable they’ll indicate that as well.

If the Where’s My Refund tool doesn’t recognize the information you enter, it’ll then ask you for the specific date you filed and whether it was a paper or electronic filing.  If they still can’t find your information the Where’s My Refund tool will give you a reference number and ask you to call them at 1-800-829-0582, extension 362.

The IRS suggests that you wait to use Where’s My Refund at least 72 hours after electronic filing or 3 weeks after paper filing.  You can try it earlier but chances are your return is still being processed and won’t have status information to report.

IRS Phone Number

If you don’t have access to the Internet, you can also check the status of your tax refund by phone at one of the two numbers:

• IRS Refund Hotline: 1–800-829-1954
• IRS TeleTax System: 1–800-829-4477

Are Tax Refunds Taxable Income?

If you got a tax refund last year, will it be taxed this year?  The answer, as is the case with most personal finance questions, is that it depends. If you recieved a federal refund it’s not considered taxable income on your federal tax return.

However, if you itemized your deductions on your federal return and claimed a deduction for state and local taxes last year, then you may have to pay taxes on a portion of that refund.  There will be a tax refund worksheet as part of your tax form 1040 that helps you determine the how much of your state tax refund is taxable. The good news is that if didn’t itemize and you claimed the standard deduction on your federal tax return last year, your state tax refund is not taxable.

Online tax software is becoming more popular each year for people looking to file their federal income tax returns on their own.  Compete, a company that measures website visitors across the Internet, released a report this month that showed 11.5% more consumers visting the category of “Accountancy and Tax Service” sites than the previous year.

All three of the main online tax prep software sites saw more visitors than the year prior, with Tax ACT seeing a huge increase:

• Tax ACT – Up 42%
• Turbo Tax – Up 15%
• H&R Block – Up 15%

Of course, it’s no surprise that online tax software websites had a big increase in the number of visitors in January that’s when tax season starts nbsp;but the increase from previous years is what points to more people filing online. 

Traditional Tax Prep vs. Online Tax Filing

A recent Wall Street Journal article (trial subscription required) takes a look at how traditional tax prep companies are losing customers to online tax software.  While companies like Jackson Hewitt are suggesting that the bad economy has more people paying less to do their taxes themselves online; the tone of the article suggests that the shift to online tax filing is a long term trend that brick and mortar tax prep businesses should be concerned about.

Why Online Tax Software? 

So why are more people moving to online tax software vs desktop tax software or manually filing?  Here are a few things that come to mind.

Convenience – The first reason I can think of is that online filing is certainly more convienent than having to go to the store and buy tax software and then install it on your computer. All you have to do is open your browser and you can get started in just a minute or two.

Broadband – A few years ago this might not have been as feasible since more people had slower internet connections. Can you imagine trying to prepare your taxes using dial-up, I’d rather have my fingernails pulled out than have to sit through that frustration!

Promotion – Companies like Intuit and H&R Block are really emphasizing online tax filing.  For example, when I watched an episode of the show LOST on HULU a few weeks ago, H&R Block at Home was the exclusive advertiser for the program. I think the companie are also doing a good job of reaching out and interacting online.  For example, this interview I did with Intuit Vice President Bob Meighan about TurboTax online and also the presence of Intuit employees on social media sites.

Cost – I don’t know if this is the case but I imagine that offering the software online lowers the cost of delivering the product.  Of course, what the companies do with the cost savings is up to them but they could use it to help out and attract customers with things like the H&R Block at Home discount weekend.

If you do your own taxes, are you using online tax software? If not, what are some of the reasons?

Turbo Tax Review

I’ve used Intuit’s TurboTax to file my income taxes for the last five years. During that time, I’ve used a few different versions including the desktop and online versions of the software. I like the online version the best, and currently use the TurboTax Home and Business to handle my business filing needs. This year, I’m also going to give the TurboTax Business version a try to file taxes for my multi-member LLC.

Thanks to contributing writer, Debbie, for sharing her experiences with TurboTax.

TurboTax Free Trial

One of my favorite features is the ability to start using the online version for free. You can create an account on the website, and start entering your information as if you were going to use the software to file.

Just entering information doesn’t mean that you will have to use TurboTax to file your taxes. This let me try it out to see if I would like it before I had to make a decision to pay and use the software to actually file.

TurboTax e-File

I always use the e-file option, because if I’m owed a refund it helps me get it much faster than if I was to print and mail it. The IRS confirms receipt of the tax return within 48 hours, and the refund is processed in about 8 days. Federal e-filing is included in the price of your choice of TurboTax software – but if you want to e-file your State return, you may have to pay additional depending on where you live.

TurboTax Interview

When I first started filing my own taxes I didn’t know much about it. TurboTax literally takes you through your information one step at a time, telling you what information you need to gather and how to enter it into the software. The software handles all of the actual math and inserting your answers into the appropriate IRS tax forms.

I always go through every section possible, even if I don’t think it applies to me, because I’ve been surprised a few times at deductions I can claim that I would have skipped otherwise.  You don’t have to complete your information all in one sitting, either. You can save your progress and come back to it at a later time if you run out of time or just need to take a break!

Tax Software Challenges

One thing I had trouble with in previous years was finding a specific section to enter information. For example, I wanted to make adjustments to my home office expenses after I had already finished that section, and I had a really hard time finding it. I think for new users of TurboTax, it can be a challenge to navigate around through the sections to find a specific area.

I don’t think Intuit has made any changes to this, but I noticed this year when I went back to enter information I skipped over my first time through the process, it was a lot easier for me to find it. I’m guessing this is due to my experience level with the software now, rather than a change to the software itself because everything seems to be working the same as it has in previous years.

Tax Questions

If while you’re entering information in TurboTax there is something you don’t understand or a question that isn’t answered, you can use the Live Community feature to get help. There are a few options for getting assistance – an interactive agent, a community forum where other users of TurboTax answer each others questions, and a live phone call with a tax expert.

If you choose to make a phone call to a tax expert, it will cost $29 for 20 minutes – but chances are your questions can be answered through the interactive agent or community for free.

Tax Audit Check

I love that when you’ve finished entering all of your information, TurboTax runs a “check”. It will look at everything you’ve entered to see if there are any discrepancies or obvious errors and then takes you to that section within the software to make corrections.

It will also let you know what your audit risk level is based on the information you’ve entered and give you opportunity to purchase optional audit risk insurance. If you purchase the audit risk protection and your return is audited, TurboTax will help you understand why, and help you gather the information you need to provide to the IRS.

Hopefully this TurboTax review was helpful if you still haven’t filed your tax return yet this year and are considering tax prep software. Good luck doing your taxes!

The federal income tax brackets for 2010 probably aren’t the tax rates you’re worried about right now if you’re still working on your tax return for last year.  Although the tax brackets don’t tend to change significantly from year to year; over time the changes in tax rates add up so it makes sense to keep an eye on them.

Of course the federal tax brackets are going to change each year whether you watch them or not but you can be aware of the tax tables as you do your tax planning for the year to come.

Here are the 2010 income tax brackets along with an overview of the different brackets and common questions regarding tax tables.

What are tax brackets?

Tax brackets were established by Congress with the idea of taxing citizens based on their varying income levels. Tax brackets are based on your amount of taxable income after deductions and exemptions and tells how much will be owed in federal taxes for every dollar earned. Tax brackets are also dependent upon your filing status. Each year tax brackets are reconfigured according to rates of inflation.

Will my entire income be taxed in one bracket?

Your entire income is not taxed within one bracket. For example, in you are single and earn $40,000, the first $8,375 will be taxed in the 10% bracket, then from $8,375 up to $34,000 will be taxed in the 15% bracket, and the remaining $6,000 will be taxed in the 25% tax bracket.

Tax Bracket	Head of Household	Married/Filing Separately
10%	$0-$11,950	$0-$8,375
15%	$11,950-$45,550	$8,375-$34,000
25%	$45,550-$117,650	$34,000-$68,650
28%	$117,650-$190,550	$68,650-$104,625
33%	$190,550-$373,650	$104,625-$186,825
35%	$373,650+	$186,825+

Tax Bracket Overview

Single – This status is for unmarried, individual tax payers.

Married/Filing Jointly – This status applies to married couples who choose to file their taxes together in one return.

Married/Filing Separately – This status is for married couples who choose, for personal or financial reasons, to continue filing separately, though not as a Single status.

If you are married but filing separately, keep in mind with children that dependent exemptions can only be claimed by one of you, not both.

Head of Household – This status does not claim marital status. A dependent does not have to be claimed to qualify as Head of Household.

2010 Tax Updates

Here are some things to note for your 2010 federal income tax returns:

• New/additional Tax forms such as Form 2553 for election by small business entities: or Form 8868 for internal real estate mortgage investment conduit returns.
• Electronic online filing will be strongly encouraged more than in past years.
• New standard deductions for 2010 are $11,400 for married couples filing jointly, $5,700 for singles/separated and married couples filing separately, $8,400 for heads of household.
• Unlike last year’s increase, the Gift Exclusion remains the same at $13,000.
• Also unlike last year, personal exemptions will not increase, remaining at $3,650.

Congrats to the winners of the free Turbo Tax giveaway that I announced over the weekend!

The announcement was at the bottom of the post that looked at the common income tax problems that contest entrants experienced.  I haven’t heard back from all the winners so in case you missed it, I’m posting it again here with a little more descriptive title.

Thanks again to everyone that participated and stay tuned for another upcoming givewawy of tax prep software.