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Business Money

Moves to lower your tax bill

Death and taxes might be certain, but the latter changes each year.

Even without major tax legislation — thanks, political gridlock — taxpayers need to be aware of even slight adjustments that could benefit them as they prepare their returns.

This season, filers will come across new tax forms, a twist on an education tax break that can benefit parents of high school students, and changes in mileage reimbursements.

Here are tips for lessening your tax bite and a suggestion for putting your refund to good use.


First-time homebuyer credit This popular $8,000 credit expired for most people in 2010.

But it was extended into last year for members of the military, foreign service and intelligence community who had been working outside the country. They can receive the credit if they purchased a house in the U.S. by April 30, or if they entered into a contract by that time and concluded the sale by June 30.

There is more than one version of the credit. The one in 2008 was worth up to $7,500 and must be repaid over 15 years. This is the second year that filers are repaying the credit through their tax return.

Jackie Perlman, a tax analyst with the Tax Institute at H&R Block, says many taxpayers aren't sure how much they must repay. The Internal Revenue Service, she says, now offers a handy online tool at irs.gov that allows you to plug in your Social Security number and find out the amount owed.

Education break Taxpayers within certain income limits can deduct up to $4,000 in college tuition and fees paid last year. But the IRS recently clarified the rules, making some classes taken by high school students eligible for the tax break, too, Perlman says.

Parents with a high school student who took college classes and paid tuition to the college can also qualify, Perlman says. The deduction is retroactive.

You can amend old returns going back to tax year 2008 to claim it, Perlman says. After April 17 — this year's tax deadline — you will be able to amend tax returns going back only to 2009, she says.

Retirement You have until the tax deadline to contribute to a traditional individual retirement account and get a deduction on your 2011 return. The maximum contribution is $5,000 for the year, or $6,000 for those 50 and older.

You can qualify for a deductible IRA no matter how much you earn if you aren't covered by a retirement plan at work.

If you do have such a plan, you can deduct all or some of your contributions, provided you meet income limits, which have gone up. A full or partial deduction is available to singles earning less than $66,000 and joint filers with income below $110,000.

Even if you don't qualify for a deductible IRA, you can still boost your retirement savings by contributing to a Roth IRA by the tax deadline. It won't lower your tax bill. But your contribution is made with money that's already been taxed, and earnings will be tax-free in retirement.

The income limits to qualify have gone up. A full or partial contribution can be made if income is under $122,000 if single or below $179,000 for joint filers.

And if your goal is to save for retirement — which it likely should be — you can salt away more dollars this year in a 401(k). The maximum contribution has gone up to $17,000 this year. Workers age 50 and older can throw in an additional $5,500.

Double-check deductions Income limits to qualify for tax breaks often go up with inflation. And if your income remained flat or dropped after a spouse lost a job, you now qualify for certain deductions.

One to look out for: the federal earned income tax credit for low- to moderate-income workers.

The IRS reports that one out of five eligible workers don't claim it. They're leaving lots of money on the table. The average credit received by Marylanders last year was $2,121.

The credit is tied to income and family size. The maximum credit is $5,751 for taxpayers with three or more children and income under $43,998 if single and below $49,078 if married filing jointly.

A credit reduces your tax bill dollar for dollar. But this one is refundable, which means that if you don't owe any taxes, you get the credit as a refund.

Plus, Marylanders claiming the federal credit are entitled to the state's earned income tax credit, which is worth half of the federal credit.

And if you don't owe Maryland taxes, the state credit also is refundable. The refundable credit, though, is worth 25 percent of the federal credit. (A bill recently introduced in the Maryland legislature would increase that to 30 percent.)

Mileage reimbursements If you deduct mileage for business purposes, be aware that the rate changed in mid-2011.

For the first half, the rate was 51 cents per mile, rising to 551/2 cents for the rest of the year.

If you used your vehicle for medical purposes, such as visits to the doctor, the rate was 19 cents for the first six months, and 231/2 cents thereafter.

"I have heard from return preparers that when this happens, people claim all their mileage was in the last six months of the year," says Mark Luscombe, principal analyst with CCH, a provider of tax information.

But tax experts warn you must keep an accurate, detailed log of your mileage if you don't want to run afoul of the IRS.

New forms Since last year, the IRS has been phasing in a requirement that investment firms report the cost basis — the purchase price of securities — once they're sold. Apparently, some investors haven't been accurately reporting this, costing Uncle Sam billions of dollars in lost revenue.

As part of this effort, investors who sold securities will have to fill out a new form, 8949. Investors won't have to report much more information to the IRS than before, but it will be spread across more forms, Luscombe says. It's possible, he says, that investors might have to fill out as many as three 8949s.

"That seems to be confusing people a lot," Perlman says. "Hopefully, you're doing this with software."

Maryland tax returns also have a new form, 502B, to claim dependents. It's part of fraud prevention, and the form will be used to verify dependents' Social Security numbers.

Ways to save The average federal refund last year was $2,913, while the typical Maryland refund was $1,124. To encourage savings, the IRS and Maryland will split a refund and directly deposit it in up to three accounts.

One of those accounts includes the Maryland College Investment Plan, a state-sponsored college savings plan. Go to collegesavingsmd.org for information on directly depositing refunds into the plan. To have refunds deposited in Maryland's prepaid tuition plan, call for instructions at 888-463-4723.


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