4 tax breaks for tough times
If your family is struggling financially, you may be able to save on your tax bills with deductions for education, job searches and more.
This post is by Bill Bischoff of MarketWatch.com.
While the economy has improved, it’s still underperforming, and it may not have gotten any better for you personally. So let’s cover some tax-saving opportunities that are likely to be helpful between now and whenever the sunshine really breaks out.
Going back to school
Improving your resume by going back to school will put you in a better position when the job market turns in your favor.
Meanwhile, you can probably collect some tax breaks to help offset your expenses. The two most valuable breaks are the American Opportunity tax credit (worth up to $2,500 per year for the first four years in an undergraduate degree program) and the Lifetime Learning tax credit (worth up to $2,000 per year for graduate school and nondegree classes).
Two other breaks that can be helpful: the deduction for up to $4,000 of annual tuition costs and the deduction for up to $2,500 of annual interest on school loans.
Helping a struggling relative
If you’ve been assisting a relative by providing a place to live and/or paying some bills, you may be entitled to some extra tax-saving write-offs on your Form 1040. These breaks are often forgotten because, frankly, many folks never needed to help out relatives when the economy was stronger. Here’s what to look for.
- Dependent exemption deduction: You can potentially claim a $3,800 personal exemption deduction if you paid more than 50% of the support for a qualified relative last year or up to $3,900 if you do so this year. Qualifying relatives can include a parent, an adult child, a grandchild, a sibling or stepsibling, a niece or nephew, and certain in-laws (such as a son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, sister-in-law). There’s no requirement for a person who meets the preceding relationship requirement to actually live with you. However, when the person does live with you, it will usually be much easier to meet the over-50%-of-support requirement. Here’s the fly in the ointment: The supported relative’s gross income for the year must be less than the dependent exemption amount ($3,800 for 2012; $3,900 for 2013) in order for you to claim that person as your dependent. However, this restriction is less likely to be a deal-breaker during a weak economy.
- Head-of-household filing status: You may be able to use favorable head of household (HOH) filing status, which gives you lower tax rates and a bigger standard deduction. Generally, you must be unmarried at the end of the year in question to file as an HOH. A common (and expensive) error is filing as a single taxpayer when HOH status is allowed. In today’s still-weak economy, HOH status may be available to you for the very first time, because you are now supporting an out-of-work parent or other relative.
- Supported parent: If you can claim a dependent exemption deduction for a supported mother or father, under the qualifying relative rules explained earlier, you are eligible for HOH filing status if you also pay more than half the cost of maintaining the supported parent’s principal home for the year. There’s no requirement for you and your supported parent to actually live in the same household.
- Other supported relative: If you can claim a dependent exemption deduction for another person, under the qualifying relative rules explained earlier, you are eligible for HOH filing status if you also pay more than half the cost of maintaining a household that is the principal home for both yourself and the supported person for more than half the year. In other words, you and the supported relative must actually live in the same household for more than half the year in order for you to qualify for HOH filing status based on helping that person out.
You may be able to claim a tax-saving write-off for expenses to look for a new job. You must itemize to benefit, and no write-off is allowed if you’re trying to switch occupations. If you have qualifying expenses, add them up and treat the total as a miscellaneous itemized deduction item on Schedule A of Form 1040.
Appeal your property tax assessment
Many property owners are getting hit with property taxes on inflated assessed values that are nowhere near the current truth (even though real estate prices are now recovering in many areas). Fortunately, it’s often relatively easy to appeal an assessment, and doing so could save you hundreds, or maybe even thousands, of dollars each year. If you also own a vacation home or rental property, the potential savings are that much greater.
A few years ago, I appealed the valuation of my home and shaved $1,400 off the annual bill. So far, I’ve saved $4,200, and counting, from a process that only took a couple of hours to complete. Based on my experience, which was quick and easy, you don’t necessarily need to hire someone to put together an appeal. However, strict filing deadlines usually apply to appeals, so pay close attention to your next property tax assessment notice (it will probably state the deadline).
The last word
If you qualified for any of the aforementioned federal income tax breaks last year, don’t forget to claim them when filing your 2012 Form 1040. As for your possibly overstated property tax bill, you’ll have to wait for the next notice to do anything if the appeals deadline is history. Put it on your to-do list.
More from MarketWatch.com and MSN Money:
- H&R Block snafu delays 600,000 refunds
- How to file taxes for free, or nearly free, online
- Where to get free help with your taxes
- 13 tax breaks you can get without itemizing
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