Adjust I.R.S. Tax Deductions

US tax filing doesn't have to feel like root canal. The pain can be dulled once you realize that tax withholding, filing status, and allowable deductions can be adjusted each tax year, all of which can yield a greatly reduced tax burden. Essential, however, is to keep abreast of the allowable deductions, which change from year to year. Here are some suggestions for gaining mastery over filing taxes and walking away with some cash!

Steps

  1. Gather all of your records together. Take the time to get everything in order before you start doing anything. It will take a few minutes, but will pay off later.
  2. Set a time when you won't be disturbed for an hour, or so. More, if you need to organize your records. It won't take long, but you'll do yourself a huge favor if you have a time where you can concentrate.
  3. Get your records, tax forms, instruction, your calculator, and the IRS Pub 17 (a PDF available at: http://www.irs.gov/pub/irs-pdf/p17.pdf) together. Read all of the forms thoroughly so you have a good idea of the information you will need before you do anything else. This includes the return (1040/A/EZ), and the supplemental forms (Schedule A, EIC form 596, Child Tax Credit form 972, Dependent Child Care Expenses form 2441, Additional Child Tax Credit form 8812). Take the time to get everything in order before you start doing anything. It will take a few minutes, but it will pay off later. Have all of the required forms in front of you. When you fill them out, do so line by line and follow the instructions precisely. Don't get ahead of yourself, and you won't get confused. Try not to let fear hold you back. Just complete the forms as necessary, be careful, check your work, and you'll be fine.
  4. The W-4 is not the same as a return. The filing status and allowances are between you and your employer. On the W-4 the filing status is nothing more than telling your employer what to withhold from your check. It's not the same as the filing status on your return. You can play fast and loose with this to affect your refund at the end of the year. You have the option of choosing from more than one status. Determine which will benefit you the most. Regardless of your status, you can claim the allowance you want to have the maximum amount of taxes withheld from your paycheck in order to get the highest refund after you file. You can also claim the maximum allowance of 99, but be careful when doing so, as you may end up owing money at filing time. You can change this at any time during the year. Just file a new W-4 and your withholding will change.
  5. If you make a mistake, don't panic. That's what the 1040-X is for. This form is intended to tell the IRS that there was an error and that you will be amending your tax statement. The IRS knows that people make mistakes. #*Filing 1040-X is much cheaper than being audited and having to pay collections. Don't wait too long, though. If you've already gotten your refund, you may have to send some of it back.

Form to File

  1. Get the instructions on the form that you are going to file. You can follow along with the instructions online at http://www.irs.gov/app/picklist/list/formsInstructions.html without printing out the whole thing. It's just as easy and it has all the same information. While you're at it, pull up the IRS Pub 17.[1]
    • If you own a house, have paid medical expenses, and make charitable contributions, you might want to file the 1040 and the Schedule A.
    • If you are married, but renting, and have average expenses, you might want to use the 1040-A form. You can claim several of the same deductions and credits as with the 1040, but there's much less detail required. Just compare the back page of the 1040 and the 1040-A to make sure you didn't miss anything. Average expenses means that if you fill out and add all of the itemization's on Schedule A, and they are less than the standard deduction, the 1040-A is probably your form of choice.
    • If you are single or MFJ without dependent exemptions, you might want to file the 1040-EZ. This has neither schedules nor additional forms. You can only file your gross income and EIC on the EZ form.
  2. Depending upon your income sources, look for other appropriate schedules you might need to file:
    • For Self-Employment Tax, use Form 1040-SS. This is not the same as Self Employment Income.
    • For Non-Resident Tax, use Form 1040-NR.
    • For Interest and Ordinary Dividends, use Schedule B.
    • For Profit or Loss from Business (Sole Proprietorship), use Schedule C.
    • For Capital Gains and Losses, use Schedule D.
    • For Supplemental Income and Loss use, Schedule E.
    • For Farming, use Schedule F.
    • For Household Employment Taxes, use Schedule H.
    • For Self-Employment Tax, use Schedule SE.
    • For Estimated Tax, use Form ES.
  3. Once you decide on your return form get the instructions and a copy of the Pub 17. The IRS wants you to do your own taxes; that's why they spend so much time and money to provide the instructions, Pub 17, worksheets, telephone help lines, etc. Don't let all this sound complicated. We've all been programmed to fear the IRS, but they actually go out of their way to make things easier.
  4. Put the label from your booklet on the address area, or simply fill it in completely. Turn the form over and put your name(s) and Social Security Number in the head space at the top so you don't forget later. If your spouse passed away during the year, or you are filing as Qualifying Widow(er), write DECEASED after the name of your spouse. Most people forget this simple little step, but the IRS wants it, and it is helpful.

Filing Status

  1. Choose your filing status based on your marital status first, and then consider your household status.
    • Single--if you are unmarried and have no dependents, you will claim Single. You can file Single only if you are unmarried under law. If your spouse died before the first of the year being reported you can still file single, although Qualifying Widow(er) may give you a lower tax liability or a higher refund. Marital status details are found in the IRS Pub 17 on page 22.[1]
    • Married Filing Jointly-MFJ--if you are married, select Married Filing Jointly (MFJ). You are considered married if you have lived together for more than 6 months, not legally separated. If your spouse is in a combat zone, you are considered to be living together, and you may sign whether or not you have a power of attorney.
    • You must be married in a state-approved civil or religious ceremony, or by a nationally approved means if married in another country. For tax purposes, common law marriages are valid only in Alabama, Colorado, Kansas, Rhode Island, South Carolina, Iowa, Montana, Oklahoma, and Texas. Check your state law for specific criteria. Washington, D.C. recognizes common law marriages, but it is not a state, therefore, that marriage is not valid for tax purposes.[2]
    • Married Filing Separately-MFS--if you are married, but legally separated, you may have to file MFS. You can file MFS is this results in a lower tax liability than the joint return, or if you choose to file for only your income. You could gain a lesser tax liability. This choice has its drawbacks. There are significant disadvantages to filing separately.
      • One spouse claims the dependent exemptions and will have the right to itemize and claim the standard deduction, but that will be the same standard deduction as if filing single. Almost all credits and deductions will be halved. The other spouse can claim the personal deduction only, but cannot claim the dependent exemption, 65, blind/disabled, or the standard deduction. Additionally, dependent and child care expenses, child tax credits, adoption expenses, EIC, and many other credits and deductions are forfeit.[3]
      • Under MFS, if your spouse files for deductions and credits due to you, because you have Calculate Child Support, for example, you can claim the proper deductions and credits by filing the Innocent Spouse Relief form 8857.[4]
    • Qualifying Widow(er)-QW--If you are widowed during the year being reported you should still use the MFJ for that year. The following two years you can use the Qualified Widow(er) status or single, whichever gives you a lower tax liability. After that you will use Single, or Head of Household, if you qualify.[5]
    • Head of Household-HH--if you are unmarried, paid more than 50 percent of the cost of keeping a home, and have Qualifying person living with you, except your dependent parent doesn't have to fit the residency test, you may be able to file Head of Household.[6]
  2. Death of a spouse: If your spouse died during the year being reported you would still file MFJ, but if your spouse died after the first of the year, but before the tax forms are signed, the administrator or executor of the will is to sign. Other exceptional criteria are found in the IRS Pub 17 on page 23.[1]

Dependents

  1. Once your filing status is determined, move on to your Determine if a Student Is Your Dependent. This part can be complicated and confusing. You will want to refer to the Pub 17 if you have anything but the standard dependents. To take an example, a single woman with a child lives with her mother. Both adults work and make enough to file, but the mother pays more than 50 percent of the household expenses. Under all the obvious conditions, she could claim both the daughter and the daughter's child. Not so. When the daughter files, only she can claim her child.
    • There are also separate rules for what are known as Qualifying Child and Qualifying Relative.[7]
    • There are 6 conditions that must be met in order for a child to be your Qualifying Child: see the IRS Pub 19 at page 29.[1]
      • Relationship--son, daughter, or their descendants, sibling or descendant of any, halves and adopted included.
      • Age--younger than 19 on December 31, younger than 24 if a full time student, younger than you or your spouse if you are MFJ, and/or permanently disabled (regardless of age). You can't claim a step-child that is older than you, even if s/he is 18.
      • Residency--must live with you 6 months out of the year.
      • Support--you pay more than half of his/her support. The Support Test is always the same. More than 50 percent.
      • Joint Return--the Qualifying Child cannot be married and filing a joint return.
      • Special Conditions for a Qualifying Child of more than one person. If another person can claim this dependent, the person who meets all of the first 5 tests claims the child. Tie breaker rules will identify who can take the exemption. Tie breaker rules are residency and support oriented. This is why detailed records are so important. If the child lived with you 183 days of the year, but you can't prove 50+ percent support, compared to the other parent, you may lose the exemption.
    • There are four conditions that must be met in order for a person to be a Qualifying Relative:
      • Cannot be a Qualifying Child,
      • Member of Household or Relationship--must be a member of the household or qualify by relationship. Some exceptions are allowed to this rule. The exemptions can be found on page 33 of the IRS Pub 17. These Qualifying Children are very often claimed with the Head of Household filing status.
      • Gross income--must be less than the established maximum for that year.
      • Support--must contribute more than 50 percent of his/her support. See Pub 17 for dollar and/or percentage amounts. If neither person contributes more than 50 percent of his or her support a Multiple Support Agreement, Form 2120, must be filed.
      • Note: A Qualifying Child or Qualifying Relative can work and file his/her own return, but s/he can not take any dependent exemption. The filing is only to claim income and receive a refund. Also, if someone else can claim you, you can file to report your own income and get a refund, but can not take any dependent exemptions.

Adjustments

  1. Insert your gross income on the first line after the dependent exemption section. Everything after this line, before the adjusted gross income, are adjustments.
    • Additions Of Taxable Interest, and Unemployment on the 1040-EZ; Taxable Interest, Dividends, Capital Gains, Ira Distributions, Pensions, Unemployment, SSA Benefits, And Deductions Of Educator Expenses, Ira Deductions, Student Loan Interest Deductions, Tuition And Fees Deductions on the 1040-A; and others on the 1040.
  2. This is where the 972, 2441, & 596 Forms and Publications come into play. The majority of adjustments are available year to year, others are only available as passed. These are adjustments allowed only for certain qualified claimants that congress must approve on a yearly basis such as the Educator's Allowance for teachers. You can go to the IRS web site, usually in December, and the adjustments should be listed there. Be careful to look for them. The most common credits are:
    • For Earned Income Credit Schedule EIC, sometimes called the Earned Income Tax Credit, use the form with Pub 596,
    • Child Tax Credit (Publ 972),
    • Dependent Child Care Expenses (Publ 2441).
    • Additional Child Tax Credit (Publ 8812). Additional here doesn't mean more, it means another. The Additional Child Tax Credit is a refundable tax credit for people who have a qualifying child and did not receive the full amount of the Child Tax Credit. If you qualify for the full, regular Child Tax Credit, you can't claim the Additional Child Tax Credit.
  3. Pay special attention to all the adjustments on the front of the 1040 form. There are some that are allowed even though you do not itemize.
  4. Deductions for education that is required to keep your job, educator's supplies, business uniforms and necessary expendable supplies and other similar expenses that are not paid for by the employer are often missed in the itemization.
  5. Claim the filing status and exemptions on page one, and the tax credits, and payments on page two.
  6. Once you've gotten this far and if you're not itemizing, you're done here. Just do the math, check your figures, sign the form, and relax over a job well done.

Itemizing

  1. Regardless of which form you are using in addition to the 1040, aside from credits, it's itemizing. Keep detailed records for all itemizing expenses. Read through the instructions line by line. Don't get ahead of yourself and you won't get confused.
    • Medical and dental expenses;[8]
    • Certain taxes you've paid;
    • Receipts for interest paid on home loan and for property tax including tax paid as part of your mortgage payments; (See 1040 Schedule A Worksheet)
    • Charitable and religious contributions;[9]
    • Casualty and theft losses;
    • Job expenses and miscellaneous deductions;
    • Required non-reimbursed job expenses including your business expenses such as: travel and temporary lodging (but not commuting expenses to your regular job location), required job training and education that is required to keep your employment, as well as professional dues;[10]
    • Special allowed deductions for damages in times of a theft, or local natural disaster where you have direct damages (including your personal costs of losses due to fire, storm, flood, for example: major natural disasters such as 2004 Sumatran Tsunami, 2005 for Hurricane Katrina, 2009 Haiti Earthquake, etc.).[11]
    • "Other Miscellaneous Deductions" for page A-11 of the Form 1040 Schedule A.
  2. Read official IRS tax filing instructions for the schedule you've chosen to be sure that you know and understand the itemization's and the meanings of the IRS instructions.[12]



Tips

  • The IRS rules are very forgiving when you look to pay the minimum tax and gaining the maximum refund, not so should you make unlawful claims.
  • Publications are listed on the IRS Publication Picklist. [13]
  • Forms and Instructions are listed on the IRS Form Picklist. [14]
  • Read and fill out all of the credit and deduction forms. Leave the 1040-type form for last. Read the 1040-of-your-choice first. Fill out the forms as you go along, and put the end results on the return. When they are all done, do the math. When that's finished, the return will almost fill itself out.
  • All forms are searchable on the IRS Topical Index. [15]
  • Make sure all lines are filled in.
  • IRS Publication 17 is called the Preparers' Bible. If you have any questions about exemptions, deductions, or credits you will find all your answers here.
  • Many of the credits require separate forms to be included to support those claimed on side 2 of Form 1040. Make sure they are filled in correctly and completely.
  • All itemized items claimed on Schedule A, and any other Schedule, need to be supported with complete records such as receipts.
  • Some kinds of deductions may be estimated such as claiming a small cash contribution (for example a reasonable amount per week at church should not be a problem) for which you do not file out a donation form or church donation envelope, keep concurrent records or receive any receipts.
  • Because of the Special Rules, MFS would generally assess a higher tax.
  • For more forms that are commonly used in personal filing see the IRS Picklist. [16]
  • Don't get Common-Law and Community Property confused.
  • Common Law marriages must be dissolved or separated in the same means as marriages in all other states.

Warnings

  • Putting furniture out on the curb is not a charitable contribution, even if someone takes it.
  • This is not tax advice. Tax laws change from year to year. This article attempts to stay within the most common adjustments. It is intended to give you the information to do your taxes yourself. You should be able to do every kind of the most common individual taxes with the instructions and the Pub 17. However, if you run into questions that are just too confounding, don't hesitate to contact a pro. You can even call the IRS help line. They don't bite. Really.
  • A section of a common room in the house cannot be claimed as an office, but a specific, isolated space clearly for your home business office may be allowed.
  • The IRS will pursue you relentlessly if anything on your return seems fraudulent, and is not corrected. If they bring an error to you attention, just correct it and follow it through. File a 1040-X Amended form as soon as possible to correct the error. It's a correction process that's there to help you amend an error. The only thing you can really do wrong is to ignore it or run from it.

Related Articles

Sources and Citations

  1. ↑ 1.0 1.1 1.2 1.3 http://www.irs.gov/pub/irs-pdf/p17.pdf
  2. ↑ http://www.ncsl.org/default.aspx?tabid=4265
  3. ↑ http://www.irs.gov/pub/irs-pdf/p17.pdf – IRS Pub 17. p.23
  4. ↑ http://www.irs.gov/pub/irs-pdf/p17.pdf – IRS Pub 17. p.24.
  5. ↑ http://www.irs.gov/pub/irs-pdf/p17.pdf – IRS Pub 17. p.24
  6. ↑ http://www.irs.gov/pub/irs-pdf/p17.pdf – IRS Pub 17. p.243
  7. ↑ http://www.irs.gov/pub/irs-pdf/p17.pdf – IRS Pub 17 pages 28, 32
  8. ↑ http://www.irs.gov/pub/irs-pdf/p17.pdf – IRS Pub 17. p.149
  9. ↑ http://www.irs.gov/pub/irs-pdf/p17.pdf – IRS Pub 17. p.18, 163, 171
  10. ↑ http://www.irs.gov/pub/irs-pdf/p17.pdf – IRS Pub 17. pp. 192, 194
  11. ↑ http://www.irs.gov/pub/irs-pdf/p17.pdf – IRS Pub 17. p.190
  12. ↑ www.irs.gov/pub/irs-pdf/i1040sca.pdf
  13. ↑ http://www.irs.gov/app/picklist/list/publicationsNoticesPdf.html
  14. ↑ http://www.irs.gov/app/picklist/list/formsInstructions.html
  15. ↑ http://apps.irs.gov/app/picklist/list/formsPublications.html
  16. ↑ http://www.irs.gov/app/picklist/list/formsInstructions.html?resultsPerPage=200&sortColumn=sortOrder&indexOfFirstRow=0&criteria=&value=&isDescending=false
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