The problem is that for those of us addicted to free money signups, the trail of accounts left behind also leaves a trail of tax documents waiting to be downloaded.

Here’s a reminder list of accounts to trigger your memory so you don’t file before you receive all of your forms. It’s also a good checklist of accounts you’ll need to login to online if you elected electronic statements.

Free Money Reminder List for Your Tax Return

1. Betterment. If you signed up for the $25 Betterment sign up bonus, login to your account to get the paperwork. I almost had a heart attack when I printed pages and pages of taxable transactions from only my initial $250 investment. Luckily they also provided a 1099-B summarizing all the tax data, but you do have to login to get the tax statement online.
2. Lending Club. You probably won’t get a statement from Lending Club, but it’s still taxable. Here are the instructions for Lending Club taxes and chargeoffs.
3. Penfed CD. Remember the 5% CDS we opened a year ago at Pentagon Federal to stash credit card arbitrage money? Penfed is usually pretty good about mailing the tax forms in the mail, but you can login to get them early if you want.
4. Discover Bank. Here’s a weird one. Remember the Discover Bank $25 Sign Up Bonus? I got a 1099, but my husband didn’t. Login to your account online if you didn’t get a hard copy in the mail.
5. ING Direct. If you use your kids to refer their siblings for the sign up bonuses, they’ll get a 1099 in the mail; adults need to login online. Whether or not you get one in the mail is based on who the primary account owner holder is. Do yourself a favor and check online and in the mailbox. However, even if your kids don’t need to file a tax return, you’ll need to include the amount if you are electing to file for the annual savings bond interest this year.
6. Citi Checking. Points versus dollars is interesting at tax time. The Citi Checking $400 Sign Up Bonus will result in taxable income if you redeemed your points. However, if your rewards are still in point form, Citi likely won’t send you a 1099.
7. DRIPs. If you are signed up for electronic delivery of your DRIPs, you’ll need to check your account online for your tax forms. I also find that some of my DRIPs don’t send a separate tax form, but actually tell you to use your last statement from December, and they include the tax information you need on the bottom of the statement.
8. Optionshouse Computer. Do you have a new Free Dell Monitor from OptionsHouse? If so, you’ll have to report the value on your taxes.
9. Sharebuilder. You don’t have to report the $50 Sharebuilder Bonus for Existing Accounts on your taxes, since it wasn’t deposited until 2012; you’ll report it on your taxes next year. However, if you took advantage of the ShareBuilder $50 Sign Up Bonus for new accounts, you should have gotten your bonus in 2011, and it will be taxable.
10. American Express Gift Chain. I saw a mention that some people are getting 1099s from the Holiday Gift Chain. If you took part, keep an eye on your mailbox.
11. Ebay. Remember the new 1099-K for ebay sellers? Keep an eye out for these new tax forms if you have online transactions.

Which other free money bonus offers are you working to sort out at tax time?

More Help in Sorting Out Taxable Free Money

• Credit card cash back is not taxable
• Surprising Things That Count as Taxable Income
• How Do You Handle College Advantage 529 Plan Taxes?

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What is alimony?

Alimony has a very specific definition in the eyes of the IRS. Alimony can be paid to a former spouse (in the case of a divorce) or current spouse (if legally separated). Alimony is specifically defined as “a payment to or for a spouse or former spouse under a divorce or separation instrument. It does not include voluntary payments that are not made under a divorce or separation instrument.” In other words, giving to or receiving money from your former spouse “just because” is not alimony and will not be taxed as such (though it may be taxed as a gift if it’s large enough).

Alimony must take the form of cash payments made for the benefit of a former spouse. Typically, alimony is a flat amount or percentage of the higher-earning former spouse’s pay that is paid to the lower-earning former spouse each month or year. It may not take the form of a property or other non-cash settlement, and must stop at the former spouse’s death. Child support or a one-time payment at the time of the separation are NOT alimony.

Do you have to pay taxes on alimony?

Alimony is taxable to the recipient in the year it is received. The alimony payer may deduct the same amount from his or her income. The taxation and deduction does not take place unless payments between former spouses exactly fit the definition above. In addition, the two parties may not reside in the same household or file a joint return.

If you are receiving alimony for the first time this year, your income (and thus taxes owed) may be substantially higher than last year. You may owe a penalty to the IRS if you wait until the end of the year to pay taxes. To avoid this, adjust your withholding or make quarterly estimated payments to account for the increased amount.

If alimony ends or substantially decreases within three years of the first payment, the payer may retroactively lose the deduction and the recipient may be able to recover some of the taxes paid. This is known as “alimony recapture.”

How do I calculate the tax on alimony?

Alimony is taxed at your regular income tax rate. If you receive alimony you must file your taxes using Form 1040, and report the amount received on Line 11. You cannot use a shorter tax form. The alimony will be added to your other income to help determine taxes due. To calculate the taxes specifically owed on alimony, simply multiply the alimony amount by your marginal tax rate.

Alimony payers must also use Form 1040 instead of a shorter tax form. The deduction can be claimed even if you do not itemize deductions, and is reported on Line 30.

You can use the tax calculator to compute your taxes; alimony income and alimony paid are both included in the calculator.

Read more

• IRS Publication 504: Divorced or Separated Individuals
• Topic 452: Alimony Paid

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But honestly, for many people, this can be the most stress-inducing time of the year as their tables become covered with numbered forms like 1040s and 1099s. Thanks to a dizzying array of deductions, credits and exceptions, navigating the tax code, rules and regulations can be very frustrating.

Of course, the terminology of even basic concepts can be difficult to grasp. For instance, consider income, something that most people believe is easy to calculate. However, the Internal Revenue Service has a variety of definitions with respect to income, such gross income, total income, adjusted gross income and modified adjusted gross income. It would be a joke if it were not so serious. And believe it or not, we still didn’t even mention taxable income, the definition actually used to calculate tax!

Thankfully these terms are not as intimidating as they may first appear. Let’s walk through income as it relates to filing your tax return. And for simplicity let’s skip the official IRS definitions of income; I’ll do my best to explain them in regular words!

Definitions of Income for Your Tax Return

1. Gross Income: Gross income, is the term most people would associate with income: the total amount of money a person earned in a given year. Among other things, this includes salaries, wages, tips, interest and dividends. Your gross income is the money you earn at your job before all of the deductions on your paycheck. For example, if you work at a job and are offered a $50,000 salary, which is referred to as your gross income.
2. Total Income: When you begin filling out your tax return, contrary to popular belief, you do not start with your gross income. In our example, if you have a job where you earn $50,000 gross, but you put $5,000 into your 401k, you’ll actually report only $45,000 of total income for your salary. Luckily, your employer will help you compute this by issuing you a W2 form. Box 1 on your W2 will have the correct amount of total income for your job. In addition, you’ll get 1099s to help you determine the rest of your total income.
3. Adjusted Gross Income: However very few people will actually pay taxes based on the amount of total income they have earned. This is because there are a variety of deductions you can take in order to reduce your income. This is just what adjusted gross income (AGI) specifies: the amount of gross income after adjustments. Although this can be a complicated chore, it does reduce your total tax burden. Some adjustments that are normally used to calculate adjusted gross income include business expenses, education costs and IRA contributions. In our example, if you paid $1,000 in student loan interest, your AGI would be $44,000. You can see more adjustments in the AGI adjustment list.
4. Modified Adjusted Gross Income: With AGI out of the way, we can now calculate modified adjusted gross income. Modified adjusted gross income (MAGI) is used to determine your eligibility for contributions to tax advantaged accounts, such as IRAs. The contribution limits for Roth IRAs and the deduction for traditional IRAs are both based on MAGI. To calculate your MAGI, you’ll need to add back in various deductions to your AGI including the student loan interest we deducted earlier.
5. Taxable Income: Once you determine your gross income, then calculate the total income to be reported for taxes, make adjustments to get your AGI, and finally determine your MAGI to make your retirement contributions, we’ll begin working on taxable income. To get your taxable income, you need to subtract your deductions (standard or itemized) and exemptions from your AGI. Once you know your taxable income, you can use the tax brackets to calculate your tax due. Of course, it won’t be the final amount you’ll pay, as you can still deduct your tax credits.

Hopefully, the definitions of income aren’t as scary as they look! I always think it’s easier to define various terms when we walk through an example to link each definition to the next one.

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But contrary to popular belief, you do NOT pay the same tax rate on all of your income. Instead, your tax bracket tells you exactly how much tax you will owe on income falling within the limits for that tax bracket. Any income below the threshold for that bracket will be taxed at a lower rate. Confused? Read on.

Finding your Tax Bracket

Federal tax brackets are based on income and filing status. Each taxpayer belongs to the 10%,  15%, 25%, 28%, 33% or 35% tax bracket. There is a minimum and maximum income for each bracket, as shown in the table below (all numbers refer to 2012 tax rates).

To find your tax bracket, first locate your filing status across the top of the table (you can check your filing status if you’re not sure). Once you have located your filing status, locate your income in the appropriate column. Look to the far left to find your tax bracket. So, for instance, if you are married, filing taxes jointly with your spouse and have a combined income of $100,000, you will fall into the 25% tax bracket. If you are single and have an income of $100,000, you will fall into the 28% tax bracket. This is referred to as your marginal tax rate.

Calculating Taxes

Once you have located your tax bracket, you can calculate your initial tax liability. You do not apply your tax rate to all of your income. Instead, you apply the appropriate rate for income in each bracket. So let’s say the married couple making $100,000 wants to see what they might owe in 2012.

1. Calculate 10% of income up to $17,400. The couple makes more than $17,400, so calculated 10% of the full amount ($1,740)
2. Calculate 15% of income between $17,401 and $70,700. Once again, the couple makes more than the maximum amount so calculates the entire potential tax. In this case, you have to subtract first: $70,700-$17,401 is $53,299. Then apply the 15% rate to get roughly $7,995.
3. Calculate 25% of income between and $70,701 and $142,700. In this case, the couple makes $100,000 and does not need to calculate the potential tax on the full income covered by the 25% bracket. Instead, calculate $100,000 – $70,701 to get $29,2999. Then multiply by 25% to get $7325.
4. Finally, add up all of the results from steps 1 -3. $1,740 + $7,995 +$7,325 = $17,060.

The couple could owe the IRS as much as $17,060 on their $100,000 in income. Note that even though they are in the 25% tax bracket they do not owe 25% of their income – instead they owe a maximum of 17%.

However, with deductions, exemptions and credits, their actual owed tax will likely end up being much less. To project your own tax liability (and potential refund), you can use our tax calculator.

Using Tax Brackets to Your Advantage

You can use the tax bracket thresholds to do a little tax planning. For instance, the couple above was making $100,000. In order to pay less than 25% on every single dollar of income, they would have to reduce income by nearly $30,000 – which is possible if they are taking full advantage of maxing out their 401ks.

At the same time, they can make $42,000 more and pay the same rate on their last dollar of income as they are paying now. Only once they hit $142,702 in income will they start paying 28% on their last dollar of income. So if they think they might bump up against the higher bracket in 2013 but have the chance to shift rental, investment, freelance (1099) or other income into 2012, they should do so. If they were making $141,000 in 2012 and thought they would make less in 2013 they might want to shift income out of 2012 to avoid paying the higher rate. If they made just over $142,700 they might want to make some extra payments to incur deductions and thus remain in the lower bracket.

You can use tax brackets to your advantage in other situations. For instance, if you know you are in a lower tax bracket this year than you will be in years to come, it’s a great time to consider a total or partial Roth IRA conversion. If you already converted and found yourself in a lower bracket than expected this year, you could reverse the conversion and then reconvert. You could also use your current and projected future tax brackets to help you decide when to harvest investment losses – take as much loss as possible (an amount equal to capital gains + $3,000) in years when you fall into a higher bracket.

Do you understand how tax brackets work? How do you use them to your advantage in tax planning? Tell us in the comments!

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We just updated the 2011 tax calculator, complete with all of the 2011 tax brackets, credits, deductions, and everything else you’ll need to estimate your tax refund before the tax deadline.

2011 Tax Calculator

The 2011 tax calculator works based on the following inputs:

1. Enter your filing status, income, deductions and credits.
2. Enter your projected withholdings from your W4 (or your total withholding on your W2 if you have it) for the year to estimate your tax refund for April 2012.
3. Select calculate to use the 2011 calculator to estimate your 2011 taxes.
4. Select view report to see the entire tax calculator report.

Tax Calculator Inputs

Please note that this calculator uses 2011 tax tables. All of the tax parameters and definitions used to build the free tax calculator are based on the current tax laws, including the payroll tax cut.

As a reminder for the 2011 tax calculator, the outputs will be based on your tax calculator inputs. Don’t forget to include things like your Roth conversion from 2010 if you chose to spread the taxes on your Roth conversion over two years.

AMT Tax Calculator

The tax calculator also includes the AMT exemption amounts; there is not a separate AMT tax calculator.

2011 Tax Calculator Changes

We have updated the 2011 tax calculator from the original calculator. The original Bush tax cuts set to expire in 2010 were extended into 2011 with the Obama tax cuts. The Obama tax cuts were for everyone and did not use the original Obama tax cuts based on President Obama’s budget extending tax cuts for families making under $250k ($200k for individuals) and limits on itemized deductions.

If you are looking for the original tax calculator we used for 2011 income tax planning last year, the Tax Foundation also has a 2011 tax calculator that helps you project your 2011 income taxes based on all the options Congress was considering before they finalized the current laws.

It includes 2011 tax scenarios for capital gains tax rates and many of the items included in the expiring Bush tax cuts.

2011 Tax Returns

I’m working on projecting our taxes with the updated tax calculator. I still use a manual spreadsheet too, but I think the 2011 tax calculator makes it much easier for all of you to use! By the way, the tax calculator matches my spreadsheet to the dollar, so maybe it’s time for me to finally abandon my old ways!

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But did you know there’s another way to report the savings bonds interest, which could potentially save money on taxes? The option to report savings bonds interest annually could be especially appealing for kids who receive savings bonds as gifts.

Options for Reporting Savings Bond Interest

There are 2 methods for reporting the interest on savings bonds, including series E, EE, and I bonds:

• Cash reporting: Deferring the interest income until redemption or maturity, usually the default method people use.
• Accrual reporting: Report savings bond interest annually.

Tax Savings Opportunities with Annual Reporting

If you use the method to report the savings bond interest annually and you pay the tax each year for someone in a very low tax bracket (which usually includes young children), the tax due is often zero or very small.

Kids won’t owe tax if their income is below the amount that requires a child to file a tax return. However, if you’re going to be reporting a substantial amount of interest each year, you still have to watch out for the kiddie tax.

In the long run, if you manage it correctly, the taxes paid on the interest should be lower than what you’d pay if you wait to redeem the bonds when they are older, and most likely, in a higher tax bracket. After all, there most likely won’t be many more opportunities in life to take advantage of 0% tax rates.

Things You Should Know

Ownership requirements. Bonds must be issued in the child’s name to use this strategy for the kids. Parents can be listed as a beneficiary, but not co-owners.

It applies to all bonds. If you elect the annual reporting, you have to report interest annually for all savings bonds your child owns, including both electronic and paper bonds. You cannot select different bonds to use different methods.

Your election continues into the future. If you start reporting the interest annually, you have to keep reporting it annually going forward (including bonds you get at a later date).

You need good recordkeeping. In the year you redeem the savings bonds, you’ll need to remember that you already paid the interest and only pay tax on the interest for the final year. In addition, since you won’t get an annual 1099, you’ll have to calculate and report your own interest on the bonds each year.

No impact to state tax. The election you make won’t impact your state taxes; savings bonds are exempt from state tax.

Education exclusion. Some people may be hoping to wait to cash in the savings bonds to line up the redemption with college expenses to take advantage of the Savings Bond Education Tax Exclusion, but this exclusion can’t be used for bonds issued in a child’s name. It’s something to be aware of and determine if your bonds are issued that way.

How to Report Interest Annually

If you want to switch from deferred reporting to annual reporting, you can do so by reporting all of the interest so far on the bonds (through the end of the tax year). You don’t need to go back and amend previous returns.

1. Use the government savings bond calculator to calculate interest on all the bonds through December.
2. File your return, (or a child tax return, if the bonds belong to your kids) to report the interest.
3. Report the total interest accrued so far and note on the tax return that you’re switching to the method to report savings bonds interest annually.
4. In future years you can use the YTD function on the calculator to determine the interest amount. You’ll need to keep track of the amounts, but you don’t need to file a tax return for your child unless he is required to file a child tax return.

If you ever need to switch back in the future, declare your change using form 3115 (but switching back is much more complicated than the original switch).

Action Plan

I’m planning to switch our 2 year old to the annual method this year since she doesn’t have much other interest income (a casualty of being the third child!) and she’ll pay zero tax on the bond interest for the foreseeable future. Since it will be an easy, straightforward return, I’m going to use TurboTax to file a free return.

Which method do you use to report your savings bond interest for your kids?

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A reader, Rob, recently asked about the new numbers for this year. Let’s take a look at the requirements for the minimum income to file taxes in 2011 (and due in 2012).

2011 Minimum Income Requirements

The IRS released the minimum income to file taxes in 2011. For the first time in a few years, there is an increase in the minimum income to file.

For the 2011 tax year, you will need to file taxes if your gross income meets the minimum income for your filing status and age:

This table does not apply to dependents. See When Do Kids Need to File Taxes? for minimum income to file taxes for children.

Social Security Income

Gross income doesn’t include social security benefits.

However, there is an exception to this rule if half of your social security benefits plus your other gross income is more than $25,000 ($32,000 if married filing jointly). Once that happens, you’ll need to file a 2011 tax return. Married filing separate also have different social security rules.

Other Income Sources

There are special rules for self employment earnings and church earnings. You must file taxes if your:

• Self employment net earnings are greater than $400.
• Church earnings are greater than $108.28 and are exempt from employer Social Security and Medicare.

More Tax Filing Requirements

Optional filing. Even if you are not required to file a tax return, you can choose to file one. You may want to file an optional tax return if you had any federal withholding or are entitled to tax credits, like the earned income tax credit, and want to get a refund.

Other filing requirements. In addition to the income requirements, there are other circumstances when you must file a tax return. One example is if you sold your home. For all the requirements, see Publication 17.

When to file. If you earn enough money to file a tax return, you must file your tax return by the tax deadline.

Prior year returns. For last years requirements you can see the minimum income to file taxes in 2010.

After you file. Once you file, you can see How Long Does it Take to Get Your Tax Refund Back?

2011 Tax Calculator

If you are under the minimum income to file taxes, and are unsure whether or not filing your taxes will benefit you, use our 2011 Tax Calculator to compute your tax liability and refund.

Tax Filing Online

Now that you know how much money you have to make to file taxes, you can go ahead and file your taxes online right now for free with TurboTax!

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The timing of tax loss harvesting is a crucial element – there are various rules that must be understood and followed in order to get the benefit without creating additional problems.

What is Tax Loss Harvesting?

Tax loss harvesting is selling an investment near the end of the year in order to create a realized loss that can be used to offset any realized gains or ordinary income on your taxes. When you purchase an investment, such as a stock, and the price of that stock decreases, there is a loss.

Before the stock is sold, this loss is classified as an unrealized loss because the price of the stock may reverse, rising to ultimately create a gain. It is only after the stock is sold that the loss becomes realized and the loss may be used as an offset for other gains, having real tax consequences.

The practice of intentionally causing losses to become realized for the purposes of reducing taxes is called tax loss harvesting.

Why Should You Harvest Tax Losses?

Tax loss harvesting can be an effective practice if it is done carefully and within the proper overall context of the investment portfolio. While it is most commonly done at the end of the year as part of end of the year tax planning, tax loss harvesting can be accomplished at any time during the course of the year.

Your savings from tax loss harvesting will be based on your current tax bracket. You can see the impact that tax loss harvesting will have on your taxes using the tax calculator. Reduce your capital gains by the amount of the loss to see the difference in your expected tax due.

Don’t forget to make sure that the closing of the position is in keeping with the overall investment philosophy. For example, if you believe that the stock in question is on the verge of reversing, the lost profit that will result from selling the stock will more than offset the gain from the tax savings. Clearly this would not be a good choice, and yet it is one that may result if one attempts to harvest tax losses without care.

The Wash Sale Rule

One of the significant tax rules that you must be aware of is the wash sale rule. Under this rule, after a position is closed, it must remain closed for a minimum of 30 days in order for a new basis to be created. Prior to the introduction of this rule, you could simply sell a security at a loss and then quickly repurchase it as a new trade.

Now, if you repurchase the security within 30 days of selling it, the basis price used for calculating tax consequences reverts to the original price used. It is important to be aware that substituting a nearly identical security may not be sufficient to escape the wash sale rule. If the replacement security is essentially the same, the tax loss may be disallowed.

Loss Carryover

The other provision of the tax code that is important to understand is that in years in which a tax loss is substantial, there is a maximum allowable deduction: $3,000. If you exceed this amount, the capital loss may be carried forward into future years and used to offset future gains.

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Every December, as part of our end of year tax planning, I like to figure out when we should pay our property taxes to maximize our overall tax benefits.

Should you pay your property taxes this year? Or wait until next year?

When To Pay Your Property Taxes This Year

If you pay your property taxes this year, you get to take your deduction sooner. Here are some of the times when that can be the most valuable move.

You are making more money this year. If you made more money this year, and you know you’ll be in a higher tax bracket this year than you will be next year, your property tax deduction will be worth more this year than it will be next year.

If tax rates go down next year. Similar to the above one, but even if you make the same amount of money this year and next year, do you think tax rates will go down for next year? If so, then your deduction will be worth more this year than next year. I don’t know about you, but I’m willing to bet this will not be the case this year.

You get a discount for early payment. Our vacation home offers a 2% discount on our real estate taxes if we pay them early. The check is in the mail!

Get cash back paying taxes online. If you have a cash back credit card paying 5% right right now, which won’t be paying as much in the new year (I’m thinking about those of you who have 5% AARP cards expiring), it will be more profitable in cash back rewards to pay your property taxes sooner rather than later. Many cities allow you to pay property taxes online with a credit card to earn cash back.

When You Might Want to Wait

If tax rates are going up. If tax rates are going up (either based on a change in the tax rates, or on your ability to earn significantly more next year), your tax deduction could be more valuable in the new year.

When you are subject to AMT. If you are subject to AMT, paying your property taxes early isn’t going to help. In fact, property taxes are excluded as a deduction in the AMT world, so you will not see any tax benefit paying your property taxes during an AMT year.

Impacts of interest rates. The old rule of thumb used to be based on the time value of money, when everything else was equal: if you found yourself in the lower tax brackets, and you can wait to pay your real estate property tax bill until March or later, wait until next year. Same for the higher tax brackets that could pay in May or later. However, that was back when you could earn a decent interest rate on the money sitting in an account. With our interest rates so low, we currently have to look beyond just the interest rates. I’m keeping it on the list though, because maybe some day this rule will be back in play!

If you decide to wait until next year to pay your property taxes, you don’t have to wait to see the money. You can always lower your withholding on Form W-4.

How to Deduct Property Taxes

Depending on how you use your real estate, your property tax deduction will show up in various places on your tax return:

• For your home: You will need to itemize your deductions on Schedule A to deduct you property taxes. (You are no longer allowed to deduct property taxes without itemizing).
• For your rental: Property taxes for your rental properties are deducted on Schedule E.
• For your vacation home: Depending on how often you use your vacation home, the vacation home tax rules allow you to take your property tax deduction on either Schedule A or Schedule E.

More Thoughts to Consider

Your tax filing status. The above tips might not help if your filing status is going to change. Planning a marriage or divorce for the new year could change your taxes significantly complicating the tax planning for when to pay your property tax bill.

Fighting your assessment. In our area, the tax bill and negotiating your assessment with the property tax assessor are at different times of the year. If you plan to fight your assessment, be sure to look up the dates for your municipality.

Lottery tax credit. If you decide to wait to pay your property tax bill, don’t forget to request your lottery tax credit. In our area, it’s not automatically applied, and you have to file a form to request it. Of course the deadline is different than the tax bill due date, so it’s easy to miss. If you have lottery tax credits in your area, make sure you are getting yours!

Run a projection. Sometimes it easier to figure out just by running a projection both ways. Use the tax calculator to project your taxes with and without your property tax deduction for this year. You’ll be able to see the difference in dollar amounts.

When are you planning to pay your property taxes?

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It seems like every year when we do our taxes, there’s a few things we wish we would have done in December to reduce our tax bill just a little more. Sound familiar?

That’s where a little end of year tax planning results in great rewards!

Here’s an updated list of money moves to make before the new year.

Year End Tax Moves

1. Run a preview. Before the end of the year run an estimate using the tax calculator or the Turbo Tax estimator. If you wait until the new year, it’s often too late to go back and make changes. Start running projections now before the year end!
2. Bump up contributions to retirement plans. Contribute more to your 401k by the end of the year to reduce your taxable income and your tax bill.
3. Take your losses. Did you lose money on your investments? If so, you might as well sell them and take the capital loss. Commonly referred to as tax loss harvesting, losses (that exceed gains) are capped at $3,000, but you can carry them forward into future tax years.
4. Take your gains. Once again, you can pay 0% long term capital gains if you are in the 10% or 15% tax bracket. If you are planning to sell, you might as well do it before year end if you fall in this tax bracket!
5. Prepay your mortgage and real estate taxes. Even if your payments aren’t due until January, you can pay them in December to deduct this year, if you itemize. Stay tuned for more on how to determine if you should accelerate your property tax deduction into the current year.
6. Give away your money. If you were planning to give a lot of money to someone special, utilize your annual gift exclusion of $13,000. More than that and you are subject to the gift tax.
7. Use your flex spending money. The use-it-or-lose it rule makes your money disappear if you don’t use it. Check your plan for the deadline to incur costs and submit reimbursement requests. It’s also a good time to remember to enroll in your 2012 flexible spending account if you haven’t done so already.
8. Donate. We all know we can donate clothes, books, and household stuff to Goodwill. But dig deeper and you might be able to find more ways to make a charitable donation. For example, I like to remind newlyweds that you can donate wedding dresses and attire to take a tax deduction. Be sure to research the charity to make sure you know how your donations will be used.
9. Watch the news. Keep on eye on what is happening with the payroll tax cut. A 2012 payroll tax cut extension could impact your paycheck for next year.
10. Finalize your records. If you plan to deduct mileage on your personal car make sure your mileage logs are complete. Remember you will save yourself time by being organized! Review how long you need to keep your paperwork before throwing out any records.
11. Review your checklist. I keep an end of year tax planning and finance checklist. The checklist comes in handy to determine what needs to be done each year to keep our finances in order. If you don’t have an annual list, now is a great time to make one. Just write everything down as you go.
12. Make 529 plan contributions. If your state has a deduction for 529 plan contributions, make your contribution before year end.
13. Do an AMT analysis. If there’s a chance that you will be subject to AMT, analyze your deductions to see if you are better off waiting to make some of the above moves. Once AMT comes into play, some of the end of the year tax moves will have no tax benefit.
14. Close your IRA. While this one is very extreme, I keep it in the list to remind you to review the performance of your IRA. If you carefully evaluated the pros and cons, and decided to take a loss on an IRA, you must close your account before year end to claim your loss on your taxes this year.
15. Determine if you need to pay tax or file. Finding out in April that you need to pay tax on unemployment, you made over the minimum income to file taxes, your kids need to file taxes or that your social security benefits are taxable aren’t ususally welcome surprises. Do yourself a favor and review the requirements before the end of the year.
16. Fund your IRA. You have until the tax deadline to maximize your Roth IRA contributions. However, if you’re getting an end of year bonus, it might be a good time to stash it away!
17. Convert your IRAs. After running our tax estimates, I determine if it makes sense to make a Roth IRA Conversion. If you need to make one, don’t forget it needs to be done by the end of the year.

What additional moves are you planning to make for 2011 end of year tax planning?

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If you’re like me, you’ve gotten a flurry of cost basis reporting requests from your brokers via email. And it’s about time I actually calculate and submit all the information… I just wish it was going to be that easy.

Let’s take a look at what is going on with cost basis reporting, what the brokers have to do, and most importantly what we have to do to prepare for 2012.

Cost Basis Reporting Requirements

The Energy Improvement and Extension Act of 2008 law requires that brokers now have to report the adjusted cost basis for securities you sell to the IRS on Form 1099-B. In addition, they have to classify the sale as short or long term. Until now, brokers only had to show the proceeds from a sale of securities.

What is Cost Basis?

The cost basis is the amount you paid for the stock, plus any commissions and fees. When you sell a stock, the difference between your cost basis and your proceeds from the sale are taxable.

The information will obviously be helpful to complete our taxes in the future, but there will be some growing pains over the next few years since brokers only had to retain that information since January of 2009.

New Cost Basis Reporting Deadlines

Brokers will have to report cost basis amounts for securities bought on or after the following dates:

• Stocks: January 1, 2011
• Mutual funds and DRPs: January 1, 2012
• All others: January 1, 2013

Brokers don’t have to report the basis for stocks you bought before 2011.

Cost Basis Methods

Going forward you can direct your broker on which method you want to use to calculate your cost basis. Brokers will have a default method of determining the cost basis. Unless you tell them differently, they’ll report the default method for any future sales. You can pick the method to apply to all transactions, or you can pick the method on a sale by sale basis.

Stocks. Many brokers, including Scottrade are using the first in first out (FIFO) method for stocks.

Mutual Funds. For mutual funds, you can average the basis of shares in an account; the averages will be separate for each account. In addition, beginning in 2012 you can use the average basis for one account, but not for another if you choose. If you previously used the double category method, you are no longer allowed to do so. If you want to use the average basis method, you should notify your broker in writing if it isn’t the default method they selected.

DRPs. For dividend reinvestment plans, you can average the basis for shares bought on or after January, 1, 2011, if “the written plan documents require that at least 10 percent of every dividend paid is reinvested in identical stock”. Fantastic. I can’t think of anything I’d rather do than spend time researching this requirement for each of my DRIPs.

In addition to FIFO and average cost methods, you’ll be able to select other cost basis methods based on the broker options. Some of the other cost basis methods include LIFO (last in first out), HIFO (highest in first out), low cost, minimum tax, maximum gain and specific lots.

What Do You Have to Do?

Since brokers don’t have to track the basis before 2011, that still falls on you. But brokers are going to ask you to provide that information to complete their records. In addition, many of the flurry of emails are asking you to select your cost basis method.

Do you have to provide the cost basis for stocks you already own to your broker? Well, I guess you don’t have to. But you’ll want to because when it comes time to file your taxes, you’ll want the gain (or loss) reported on your 1099-B to match the gain (or loss) you report on your Schedule D. Inconsistencies will be just like asking for a nice little visit from the IRS.

Do you have to select a cost basis method? While you can select a preferred cost basis method with your broker right now, you don’t have to do anything. Your broker will apply their default method and you are all set. This may not be the best choice from a tax standpoint, but at least you can cross it off your to do list.

Will there be a tax document delay? Probably. Because of the new reporting rules, brokers won’t have to give you your 1099-B until February 15 each year (it used to be January 31). If you’re used to working on your taxes right away, you might have to wait a little longer in the future if you had any stock sales.

Action Plan

All the countless hours I’ve spent wasting away making sure my Quicken data is exact down to the penny is finally paying off! Especially since some of our stocks were acquired years ago, with countless dividend reinvestments. It’ll be a pain, but at least I know I can put together the data to submit to our brokers.

I know there are many of you who are going to groan at the painful task of collecting all of this information. Feel free to commiserate about tracking down the cost basis of a 20 year old stock purchase with many subsequent reinvestments and additional share purchases in the comments!

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When Your Spouse Cheats on Taxes

We’ve discussed the potential dark side of married filing jointly previously. To recap, if you are filing your deductions and income on the same tax form and one spouse fudges information, evades taxes, etc. then you are held liable for any taxes and penalties owed due to this mistake. This becomes particularly troublesome in the case of divorce, if you are widowed, or your spouse is otherwise no longer available and willing to help pay it off—it is even true if the other spouse was the sole income earner in the family. The IRS website also states that they can come after you for tax liabilities from joint returns even if your divorce decree explicitly states that the other spouse is responsible for tax obligations.

Spouse Relief

Under these circumstances there are three types of spouse relief that you can apply for:

• Innocent spouse provision
• Separation of liability
• Equitable relief

The IRS has just made changes to equitable relief that could be in your favor.

Equitable relief was not an option in the past if the innocent spouse did not apply for it within two years from the date when the understatement of taxes was identified. Now, you can apply even if it’s been two years or more. Furthermore, if you were denied equitable relief in the past solely because it was past two years, you may reapply if the collection statute of limitations for the tax years involved has not expired. This will also be effective for cases that are currently under consideration.

To apply for any type of Innocent Spouse Relief, you will need to check out Form 8857.

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Funds in FSAs are “use it or lose it,” meaning that the amount you set aside can be used for medical expenses in the given year only, and is forfeited when the year passes (although most employers and the IRS allow for a grace period of 3-4 months). Because of the possibility of losing you funds, you don’t want to set aside too much – but because of the chance to save on medical expenses in an amount equivalent to your tax bracket, you don’t want to save too little either.

source: Images_of_Money

How Much Should You Save in Your FSA?

Follow these steps to determine the amount you should set aside for medical expenses in 2012. FSA funds can be used for you, your spouse and dependents. Make a quick list of each person and then jot down known/planned medical expenses for each by considering the following questions:

1. Do you know what can be covered by an FSA? In addition to traditional medical expenses like doctor’s visits and prescription drugs, FSAs can be used for expenses like fertility treatments, chiropractor visits, some baby-related expenses, and addiction recovery programs. Be sure you know what can and can’t be purchased with FSA funds before you start your calculations. As a tip, over-the-counter drugs and supplies are on the “can’t” list, unless you have a prescription.
2. What recurring prescription expenses do you have? FSAs can be used for co-pays and any additional out-of-pocket responsibility for prescription drugs. So if you have a recurring prescription you can use FSA funds for your portion of the expense, regardless of the amount. Write down each of the prescriptions that members of your family refill on a monthly or quarterly basis, and calculate the associated out-of-pocket costs (those not covered by insurance). This may be a flat co-pay, like $10 per prescription, or a varying cost depending on the drug’s price. Use previous pharmacy bills or contact your insurance provider and/or pharmacy for help with this step, and make note of the total.
3. How many known doctor’s visits will you make this year? Unplanned doctor’s visits come up all the time. But every member of your family probably has at least one planned appointment per year. You should set aside money for co-pays on known doctor’s visits – like your child’s 2-year-old check-up, or your annual physical. Remember that vision and dental expenses can also be paid for by an FSA – so if you don’t have vision or dental insurance (or it doesn’t cover all of your costs), include the cost of annual teeth cleanings and vision exams for each member of your family. Once again, depending on your health insurance plan you may pay a flat co-pay of $10-20, some portion of the actual cost of the visit, or some combination depending on the type of doctor (GP vs. specialist, routine appointment vs. special occurrence, etc.) – check your plan to determine how much to set aside for each visit. Add up the total cost of known visits and add it to the total from Step 1.
4. What one-time expenses might you have? For instance – do you have a child who will get braces this year? Are you or your spouse having a birthday that will require you to have more tests (colonoscopy, mammogram, etc.) than usual? Are you expecting to give birth? Some one-time costs may be totally covered by insurance (many preventative exams such as mammograms are), but others, such as braces, might come with a rather hefty cost. Research the expected out of pocket costs for each planned procedure and add them to the running total from Steps 1 and 2.
5. What did you save (and what did you actually spend) historically? Compare medical expenses from previous years with those that you have planned on for next year. Use last year’s spending as kind of a checklist to make sure you’ve included all of the things you normally spend money on, including medicines like asthma inhalers that may only be replaced once or twice per year. If you have traditionally saved more than you needed, make sure you are saving less this year – for instance, if you always save for 2 dental appointments but only make it to one, don’t save the money for two – you’ll end up losing it. If you haven’t actually followed through on pushing your medical expenses through to your FSA for reimbursement, come up with a more-organized way of doing so – or don’t set aside the money in the first place. Recognize also that your needs might have changed – if your adult child got his or her own health insurance, you will not need to use your FSA funds for their expenses, and should reduce your savings accordingly. Finally, add a cushion to the planned spending from items 1-3 to account for irregular expenses like antibiotics or trips to the doctor for a cold: reviewing historical expenses can help you decide how much, but $30-$40 per person should take care of one unexpected doctor’s visit and resulting prescription- save more if any member of your family has a chronic health condition.
6. Is your plan an HSA? If you have an HSA rather than an FSA, you won’t lose unused funds – so you can afford to err on the side of oversaving. And as we’ve discussed before, saving extra now will give you another way to pay for medical expenses or long term care in the future. Don’t contribute more than needed at the expense of college or retirement savings, but if you have a little extra money to throw in an HSA, do it.
7. What is your plan’s maximum? The IRS will limit FSA savings to $2,500 per employee beginning in 2013. In 2012 your savings may be limited by your employer or specific plan. If your planned savings as calculated in steps 1-5 exceeds the allowed maximum, save the maximum. Otherwise save what you have calculated.

Finally, don’t forget to review any changes to your insurance plans. If your plan is raising copays, deductibles, or coinsurance amounts, you’ll want to adjust your flexible spending account contributions accordingly.

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Let’s take a look at some of the questions I get around flexible spending account (FSA) plans and ease the process of enrolling in your plan this year.

Once you learn about FSA plans, they aren’t too complicated to use to save money on your taxes.

Flexible Spending Account Basics

If you haven’t enrolled in a flexible spending account before, here are the basics of the plan to get you started:

• What is an FSA? Flex spending accounts allow you to pay health care expenses using pre-tax income. Or a simpler version: you don’t have to pay tax on the money you put in an FSA.
• What can FSAs be used for? The flex spending account rules allow you to contribute money to the FSA for costs not covered by insurance: deductibles, copays, and coinsurance. In addition, you can use your FSA to pay for health care costs that health insurance doesn’t cover.
• Who is covered by FSA plans? The FSA plan is for you, your spouse, and your dependents. You should read the specifics of your employer’s plan because certain state laws may limit the specific coverages of your dependents.
• What are the 2012 FSA limits? 2012 is the last year that there are no fsa limits mandated by law. In 2013 the FSA limit will be $2,500. Employers currently set their own FSA limit. For example, my husband’s employer has a $7,500 maximum FSA contribution.

Flexible Spending Account Coverage Questions

Because employers use various companies to administer flex spending accounts, some of the processes for reimbursement vary by employer. However, the flexible spending items should remain constant between workplaces:

• Do FSAs cover over the counter medicine? No. As of 2011, FSAs no longer cover OTC drugs, unless you have a prescription from your doctor.
• Is lasik covered under FSA plans? Lasik and other types of laser eye surgery costs are covered by flex spending. It will continue to be covered in 2013, but will be subject to the lower FSA limit.
• Are orthodontics covered by flex spending plans? Yes. Orthodontia and other dental care is still covered under flex spending.
• Are reader eyeglasses covered by FSAs? Over the counter reading glasses are covered by FSAs as long as you have a prescription from your doctor.
• Does insulin require a prescription for FSA? No. Insulin is the only over the counter medicine which will not require a prescription for flex spending reimbursement.
• What items are not covered by FSA plans? Some of the most common excluded FSA items are health club memberships, vitamins, cosmetic procedures, and funeral expenses.

Flexible Spending Account Finances

Now, onto my favorite part, let’s talk money. Your employer offers an FSA plan as an employee benefit. What’s the benefit? You get to save money on your taxes:

• How much do flex spending plans save? The amount of savings you get from an FSA plan depends on your tax bracket. If you put $5,000 in an FSA in the 15% tax bracket, you’ll see a federal tax savings of $750.
• What happens to money I don’t use in my FSA? Flex plans are “use it or lose it” plans. Any money you leave in your flexible spending account at the end of the year (which often extends to March 15 of the following year using the IRS grace period), will be gone and no longer available for you to use.
• How is a dependent care account different? A dependent care account is similar to a flex spending account, except that it is used to pay for day care costs on a pre-tax basis. The dependent care limits are separate from the flex spending limits and you can contribute to both.

Now that you know everything you need to know about FSA plans, it’s time to fill out your enrollment papers for next year! I’m off to calculate how much to put in our FSA right now…

More Helpful Open Enrollment Topics

• Flexible Spending Account Changes
• How Much Should I Put in My Flexible Spending Account?
• Health Savings Account
• High Deductible Health Plans

What other questions do you have about FSA plans?

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General Tax Relief Information

Tax deadlines for businesses and individuals are extended to October 31, 2011. This extension applies to most tax returns with a previously obtained tax extension, including individual, corporate, estate and trust income tax returns as well as partnership, S corporation, trust, gift, estate and generation-skipping transfer tax returns. It also includes 3rd quarter estimated tax payments.

Hurricane Tax Extension

The new October 31 tax extension deadline applies to taxes originally due on:

• September 15 deadline for third quarter estimated taxes
• September 15 deadline for previous 2010 business tax extensions
• October 17 deadline for previous 2010 individual and business tax extensions

Additional Hurricane Irene Tax Relief

Employment and excise taxes. The IRS will also waive failure-to-deposit penalties for employment and excise taxes due within a specified period. The due dates affected by these waivers vary from state to state.

Tax preparers. A filing extension will also be offered to anyone whose tax preparers were impacted by Hurricane Irene. These individuals and businesses with a September 15 filing deadline will have until September 22 to file their taxes. This extension primarily applies to corporations, partnerships and trusts.

Fee waivers. The IRS will also waive fees for taxpayers requesting copies of previous years’ tax returns. The payers should fill out Form 4506, Request for Copy of Tax Return and put the assigned Disaster Designation in red ink at the top of the form.

Casualty losses. Taxpayers may claim disaster-related casualty losses on this year’s or last year’s federal income tax return. Claiming the losses on last year’s taxes will get you an earlier refund, but you’ll have to run the numbers both ways to see if waiting to claim the loss on this year’s return may result in greater savings.

Who is Eligible?

Anyone with a primary residence, business or workplace in the covered disaster area is eligible for tax relief. This includes people or businesses with tax documents housed in the covered disaster area. All registered workers helping with disaster relief efforts are also eligible for the tax extension. All individuals killed or injured as a result of the hurricane are eligible as well.

If any taxpayer eligible for relief receives a late payment or penalty notice from the IRS, the payer should call the number listed on the notice to have the penalties and interest abated.

States and Counties Included in the Tax Extension

Individuals and businesses in these counties and states are eligible for the Hurricane Irene disaster area tax extension:

• Connecticut: Fairfield, Hartford, Litchfield, Middlesex, New Haven, New London, Tolland and Windham Counties
• New Jersey: Atlantic, Bergen, Burlington, Camden, Cape May, Cumberland, Essex, Gloucester, Hudson, Hunterdon, Mercer, Middlesex, Monmouth, Morris, Ocean, Passaic, Salem, Somerset, Sussex, Union and Warren Counties
• New York: Albany, Clinton, Delaware, Dutchess, Essex, Greene, Montgomery, Nassau, Orange, Otsego, Rensselaer, Rockland, Saratoga, Schenectady, Schoharie, Sullivan, Suffolk, Ulster, Warren and Westchester Counties
• North Carolina: Beaufort, Bertie, Brunswick, Camden, Carteret, Chowan, Craven, Currituck, Dare, Duplin, Edgecombe, Gates, Greene, Halifax, Hertford, Hyde, Johnston, Jones, Lenoir, Martin, Nash, New Hanover, Northampton, Onslow, Pamlico, Pasquotank, Perquimans, Pitt, Tyrrell, Vance, Warren, Washington and Wilson Counties
• Massachusetts: Berkshire and Franklin Counties
• Puerto Rico: Arroyo, Aguas Buenas, Caguas, Canóvanas, Carolina, Cayey, Cidra, Coamo, Comerio, Humacao, Jayuya, Juncos, Loíza, Luquillo, Orocovis, Patillas, Ponce and San Juan Counties
• Vermont: Addison, Bennington, Caledonia, Chittenden, Orange, Rutland, Washington, Windham and Windsor Counties

The IRS continues to add more counties to the list as FEMA disaster reports are processed. You can watch for additions on the IRS Hurricane Irene tax relief announcements.

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