This is a guest post from Bob Meighan, who is VP of TurboTax.
In challenging economic times, every dollar counts. While I canâ€™t predict what the economy or market will do, I can help you identify opportunities to make sure you get the biggest tax refund possible. With less than 2 months until the filing deadline, here are my top tips for maximizing your tax deductions and tax credits.
Although the recovery rebate applied to last yearâ€™s tax return, many taxpayers did not qualify for the full amount of the rebate. If you took a pay cut, lost your job, or added another kiddie to the family in 2008, you may have a second chance at the $600 to $1,200 rebate plus another $300 for each dependent.
Stock Market Meltdown…
Even though your investments may have tanked in 2008, you wonâ€™t receive any tax benefits if you remained on the sidelines. Gains and losses donâ€™t get reported on your tax return until you actually sell the investment. A similar rule applies to assets in your retirement accounts, which include your IRA, Keogh and 401(k) plans. You donâ€™t report these gains and losses until you start withdrawing from the plan.
If you did sell last year, most mortals will report a net loss. A net loss reduces other income up to $3,000. Any excess can be carried over to your 2009 tax return where you can do the same income offsetting â€” again up to $3,000.
First, the bad news (other than losing your job). Unemployment benefits are taxable. While this sounds especially punitive given the circumstances, the IRS considers unemployment benefits as income and you need to report them. Also, severance pay, bonuses, 401K and other pension distributions that you received as part of your severance package may be taxable.
On the other hand, if you spent money to search for a job (even if it is unsuccessful) or move to start a job, these expenses are deductible. However, like most tax laws, there are some restrictions on this deduction. For example, if youâ€™re looking to land your first job out of school, job search expenses are not deductible, but moving expenses are. What a dichotomy!
Losing a home has to be terribly emotional, but there are tax benefits. Recent legislation provides tax relief to homeowners whoâ€™ve had their mortgage forgiven or reduced. Whereas in the past this was a taxable event, now it is non-taxable. To qualify, the home must be your main residence and you cannot be in bankruptcy. At year end, the amount that qualifies for tax relief is reported on Form 1099-C.
Tips for a Quick Refund…
75% of all taxpayers get a refund. Last year the average refund was just over $2,400. If youâ€™re in this happy group, file now! Hereâ€™s how to accelerate your refund.
File Electronically â€“ By sending digitally submitting your return to the IRS, youâ€™ll get your refund in about 10-14 days. That beats the 4-6 weeks for printing and mailing the return. Plus, with e-filing, you donâ€™t have to print, copy, sign, attach W-2s, and mail. Itâ€™s a very easy process to e-file. By the way, even if you owe additional taxes, e-filing enables you to file now and schedule payment for April 15 by direct deposit. Itâ€™s super convenient!
Select direct deposit â€“ Direct deposit can shave another 7 days off your refund cycle. Before you know it, your refund dollars will be in your account working for you instead of for the IRS.
In closing, tax laws are complex, confusing and full of exceptions. You have three choices today for doing your taxes â€” use an accountant, use tax software, or do them by hand. Surprisingly, about 15-20 million American still sweat it out with paper and pencil. If you do, I encourage you to try tax software. There are many free online services, like TurboTax, that give you a great way to discover all the benefits of tax software â€” free.