Due to tax preparation software programs, it’s much easier to fill out a federal income tax return now than it was years ago, when you struggled through the process with a No. 2 pencil. But you still have some work cut out for you.
Strategy: Identify the critical tax elections available on your 2013 return. Do the necessary research and make the best choices for your situation.
Here are six ways you might be able to turn a potential tax liability into a tax refund.
1. Be tax-smart about higher education. If you qualify, you can claim either a tuition deduction or one of two tax credits for higher education expenses. The tuition deduction, which is claimed “above the line,” and thus reduces adjusted gross income (AGI), is either $2,000 or $4,000. The maximum American Opportunity Tax Credit (limited to the first four years of undergraduate study) is $2,500 or you might be able to claim a Lifetime Learning credit of up to $2,000 for any undergraduate or graduate study. Both the deduction and the two credits phase out for higher income taxpayers.
Tip: The tuition deduction technically expired at the end of 2013, but there is a good chance it will be extended through this year.
2. Weigh in on state tax payments. Generally, an itemized deduction for state income taxes is a significant Schedule A item, but you might do even better by taking advantage of the option to write off the state and local sales taxes paid in 2013 if that produces a bigger deduction. (Like the tuition deduction, the state sales tax deduction expired at the end of 2013 but will probably be extended through this year.) Your sales tax deduction can be based on actual receipts or you can use a state-specific table and add in actual sales tax amounts for certain “big-ticket items” like cars and boats.
Tip: Residents of high-tax states usually fare better with the state income tax deduction.
3. Unlock home office expenses. The IRS approved a new simplified method for deducting home office expenses on 2013 returns. In lieu of deducting actual expenses, you can write off $5 per square foot, up to a maximum deduction of $1,500. But the traditional method will often result in a bigger deduction when you add up the direct expenses and the portion of the indirect expenses attributable to the home office, plus depreciation.
Tip: You’ll need extra records to support the traditional method.
4. Collect write-offs for business equipment. Underof the tax code, your small business can currently deduct up to $500,000 of the cost of qualified property placed in service in 2013, subject to a phaseout above $2 million. For 2013, you can also take a 50% bonus for qualified property. And you may write off any remainder under the regular .
Tip: It’s not a no-brainer. For instance, you might choose to forgo these breaks in order to preserve bigger deductions for expected future high-tax years.
5. Compare capital gain tax breaks. The tax law allows you to deduct investment interest expenses up to the amount of your net investment income for the year. For this purpose (not to be confused with the 3.8% Medicare surtax), “net investment income” doesn’t include capital gains. But you can elect to include capital gains in the total—and thereby increase your investment interest deduction—if you forgo the favorable capital gains rate on eligible gains. The maximum tax rate for long-term capital gains in 2013 is 15% and 20% for certain higher income investors.
Tip: This election is not “all or nothing.” You can make the election for only a portion of your long-term gains and pay the favorable capital gains tax rate on the rest.
6. Rev up tax breaks for business cars. If you meet stringent record-keeping requirements, you can deduct the actual expenses of a vehicle used for business driving. Only the portion attributable to business use is deductible. Alternatively, you can keep fewer records and deduct a flat rate of 56.5 cents per mile on your 2013 return (decreased to 56 cents in 2014). Use the method that is more advantageous.
Tip: Generally, you can’t switch to the flat rate if you’ve claimed accelerated depreciation for the vehicle on a prior return. Be aware of other potential restrictions.
Like what you've read? ...Republish it and share great business tips!
Attention: Readers, Publishers, Editors, Bloggers, Media, Webmasters and more...
" This information is proudly provided by Business Management Daily.com: http://www.businessmanagementdaily.com/37922/6-ways-to-change-your-tax-fortunes "