2011 Newsletter ~ Written by Katy Estrada, CPA (updated 12/2/11)

Contribute To Charity

And save your receipts! This helps others and helps your tax bill (if you itemize). Clean out the clutter! Give your unloved clothes, household items and furniture. Goods must be in good condition to qualify. Giving cash? Do it by check! But don’t sacrifice contributing to your own retirement. I highly recommend contributing as much as possible first to your retirement and then charity.

Retirement Contributions

Retirement Contributions remain unchanged from 2010 amounts. Traditional and ROTH IRA contributions are the lesser of $5,000 or 100% of earned income. The annual ‘catch-up´ contributions if you are age 50 and over remain at $1,000. SEP (Self-employed Plan) IRA contribution limits are 25% of the employee’s salary or up to $49,000, whichever is smaller. You may set up and fund a SEP as late as your tax-return filing date, including extensions. IRA’s must be funded before April 15th.

Mileage Rates

The IRS increased the standard mileage rates for the business use of vehicles. Beginning January 1, 2011, the standard mileage rate for the use of a car (also vans, pickups or panel trucks) is: 51¢ per mile for business miles driven, 19¢ per mile driven for medical or moving purposes and 14¢ per mile driven in service of charitable organizations.

Note: You can deduct your mileage expense OR your actual expenses.  Once you choose a deduction method, you must use that method for the life of the vehicle.  Also, if you itemize, please provide me with the miles you drove to donate goods, volunteer, go to doctor visits or pick up prescriptions.  This could add up to a great deduction.

Energy Tax Credit

The 2011 credit rate is 10% of the cost of qualified energy efficiency improvements. Energy efficiency improvements include adding insulation, energy-efficient exterior windows and doors and certain roofs. The cost of installing these items does not count, only materials. The credit can also be claimed for the cost of residential energy property, including labor costs for installation. Residential energy property includes certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass fuel.

Note: The credit has a lifetime limit of $500, of which only $200 may be used for windows. If the total of non-business energy property credits taken in prior years since 2005 is more than $500, the credit may not be claimed in 2011.

Homeowners going green should also check out the Residential Energy Efficient Property Credit, designed to spur investment in alternative energy equipment. The credit equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property. No cap exists on the amount of credit available except for fuel cell property and generally, labor costs are included when figuring this credit.

Child and Dependent Care Tax Credit

You can claim up to 35% of their care expenses, up to $3,000 for one child or $6,000 for two or more.

Acquire Needed Business Assets

If you are thinking of buying assets for your business, you still have several weeks to place them in use and qualify for bonus depreciation for 2011.  This allows you to deduct 100% of the cost in 2011. Bonus depreciation can be claimed on new assets with useful lives of 20 years or less, including machinery, equipment and land improvements.  Another option is to stock up on office supplies, i.e. paper, ink etc. and write this off in 2011.

Required Minimum Distributions

If you are 70 or older, you must take distributions from your IRA, 401(k) or other retirement account by December 31 or face a stiff penalty:  50% of the amount you failed to withdraw.  (If you turned 70 this year, you have until April 1, 2012, to take your first distribution.)

American Opportunity Credit (formerly the Hope credit)

For undergraduate students this has been extended through 2012.  Individuals with incomes up to $80,000 ($160,000 for married couples) who pay at least $4,000 in college tuition in 2011 can claim a tax credit of up to $2,500. If you haven't spent enough to capture the full credit, pay your student's tuition for spring semester in December.

IRS Audit Red Flags

Claiming too many deductions - Your return might be flagged if you claim large deductions for business travel and entertainment, take a large home office deduction or show a large overall loss. Retain all receipts for business meal and entertainment expenditures of $75 or more. For expenses less than $75, keeping a detailed diary is sufficient. In addition, the IRS employs a program called discriminate index function (DIF), which compares taxpayer deductions to others in the same income bracket. If the IRS’s DIF data finds, for example, that the average taxpayer in your income tax bracket claims $1,000 in charitable donations, and you claim $10,000, it’s a likely red flag.

In-home office deductions - Any area in your home designated as office space must be used exclusively and regularly for administrative or management activities of your trade or businesses.

What Can I Deduct?

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary. My rule of thumb is to ask yourself "Did I spend this money to help create future income?"

Note: If you have an expense that is partly for business and partly personal, separate the personal part from the business part, then deduct the business portion.

Don't just think about your tax liability once a year. With careful tax planning throughout the year, you will be better aware and possibly reduce that liability. Download a Tax Organizer Checklist here.