Think you make too much for tax breaks? Here are six you might qualify for.
You've received your tax packets in the mail and your employer and broker have supplied you with all the withholding statements and 1099s you can handle. Now all you have to do is pick your weekend, load up on Advil and enter the House of Pain. It's time to do your taxes. Again.
Well, before you get started, remember this: There are any number of ways to lessen your tax bill this year. We've got some tips on ways to save.
If you're a high-income type, you're probably painfully aware that many tax breaks are phased out (either dramatically reduced or eliminated) as your adjusted gross income, or AGI, increases. That's the price of success, right? Well, not necessarily. Believe it or not, some tax breaks are available to just about anybody -- regardless of income. Here are six of them.
Retirement Plans for the Self-Employed
If you're self-employed, you may be able to contribute and deduct up to $41,000 ($42,000 for 2005) by setting up a simplified employee pension, or SEP. Contributing to a SEP could dramatically reduce your taxable income and save you a bundle. Think you've already missed the boat for your 2004 taxes? Think again. If you don't already have a retirement plan in place, you can still set up a SEP and make a deductible contribution to your account for 2004. And that could be as late as Oct. 17 if you extend your return to the latest possible date. For more on these types of plans, click here.
Credit for Overpaid Social Security Taxes
Did you have two jobs last year and earn more than $87,900? Then you probably overcontributed to Social Security. Your credit will be for the amount you contributed beyond $5,450, which represents your half of the 12.4% Social Security tax based on a maximum salary of $87,900. Getting the money back is easy -- just report the overpaid amount (you can tell what that is by looking at your W-2s) on Form 1040, line 64.
Deducting Alimony Payments to Your Ex
This may be small consolation, but if you started alimony payments last year, they're probably deductible. It all depends on the terms of your divorce agreement. (Read our story for more on this.) Assuming you qualify, you can claim a full write-off of your alimony payments on page one of Form 1040.
Writing Off Your Gambling Losses
So Lady Luck up and left you during your last trip to Vegas. Believe it or not, Uncle Sam feels your pain, and will allow you to deduct your losses up to the amount you've won during the year. (Your winnings are taxed as regular income.) But beware: If you claim this deduction, you should have written evidence of your losses, just in case you get audited. So try to dig up some evidence (betting tickets, etc.). In the future, keeping a journal of your wins and losses should do the trick. After all, asking that blackjack dealer for a receipt might be tricky.
Writing Off Your Investment Interest
Did you borrow on margin last year? As long as you itemize deductions on your return, you probably can deduct the interest you paid on the account. The deduction for the interest paid to carry taxable investments (so-called investment interest) is unaffected by the phase-out rules that apply to most other itemized deductions listed on Schedule A. There's only one small catch: Your investment interest deduction generally can't exceed your taxable income from interest, annuities, royalties and short-term capital gains. That said, any excess interest can be carried over to the following tax year. See IRS Form 4952 (Investment Interest Expense Deduction) for all the details (including a special election to treat long-term capital gains and dividends as investment income).
The Dependent Care Credit
OK -- so this last tax break is technically subject to some AGI phase-out rules. But truthfully, nearly everybody who claims this credit is partially "phased out." What's left is still a great tax break.
If you worked last year and paid someone to take care of your under-age-13 child, you could be eligible for this credit. Keep in mind, if you're married, both spouses must work, unless one is a student. Additionally, neither of you could have contributed to a child-care flexible spending account (through your employer) to cover the same expenses last year.
If your income (married or single) exceeds $43,000 then you can take a credit equal to 20% of your child-care expenses. However, the credit limit is $600, if you have one child, or $1,200, if you have two or more. (If you earned less than $43,000 you may be entitled to a larger credit.) Thankfully, the definition of child care is generous -- it can cover anything from summer day camp to a baby sitter. See form 2441 for details. Claim your credit on page two of Form 1040.