Tax Season is in full swing! I want it make certain that you get every deduction you are entitled to this tax season. I also want to cover some of the basic deductions to make certain that none of them are slipping between the cracks. I also want to try to connect the dots with the current economy and your tax return! This will make the tax preparing experience a more interesting one, and you better investor to boot!
In order to make the most of this article, you will need to download a copy of Schedule A and refer to it in order to make certain that you dont miss a thing. Here is the link: http://www.irs.gov/pub/irs-pdf/f1040sab.pdf.
Moving down the Schedule A, lets go to the Interest you paid. Home Mortgage Interest and Points are pretty straightforward. Most people do not have points, but if you do they are deductible and you need to do a calculation.
How about Mortgage not on form 1098? (LINE 11) You can buy a house from the owner, borrow from the owner and deduct the interest? Yes you can!
If you are on the opposite side of this (as the owner) you would have to declare that interest you receive as income. It would be taxed as ordinary income which means it goes into your brackets and can be heavily depending on income.
You can see that it asks for the person name ID, address etc.. Buyer/borrower deducts the interest and seller/lender pays the interest as income. Good thing to know in the Real Estate Market with a credit crunch and there may be an opportunity there! Always make sure you get all the facts!
Line 14 Investment Interest - If you buy stocks on margin (margin = borrow money to buy stocks), then you can DEDUCT THE INTEREST? You better believe it!! Think this had anything to do with creating two stock market bubbles in 10 years?!?
If you ever do by stocks on margin like this, be very careful and make sure you are reading Seans blog before you by any stocks on margin. Then you can decide for yourself if this for you!
Also make certain you have a rock solid retirement plan before you buy on margin. There are too many hidden angles and this should only be done in a discretionary portfolio.
Financial leverage is the main disease we face in our economy today!
Why would you use leverage? Increase your returns, but you also increase your risk. Its a lesson that is being learned the hard way for many right now!
This can be tricky. It really can amplify your returns and it can be a lot of fun in a discretionary portfolio, but not in this bear market! You need a good bull market and then you need to know when it is time to get out. Most people would be better or steering away from the use of margin in their trading/investing.
Now, lets get back to your taxes and moving down your Schedule A. Gifts to charity - Note that with cash gifts under $250, you dont have to really go into too much detail. You should always have receipts, but if you feel that you could dig them up if asked. You may want to go ahead and take the deduction for checks that you wrote to your church too.
The reason is because you can dig up the checks if you needed to when asked. You can be practical here, because a lot of us give a lot more to charity than we think.
Line 17 - Other than by cash or check bags of clothes, books to the library, and toys for tots around the holidays over $250, more detail and you needed.
What is really important is that you take your time with your return and learn the tax system as it applies to you. This way you can plan better and that is where you save a lot of money on taxes. Be proactive in your tax planning!
You have to assume the tax system is pretty fair when you are planning and doing your taxes This is what will keep your moral compass on the right path. If you are serious about building wealth, you are probably going to face an audit at some point in your life. You want to start preparing now with good habits.
Keeping receipts, tracking the basis properly in your home and investments, and having a tax file that is orderly are musts.
Anyone can make a mistake on their return. If you do, you may even get a job in President Obamas cabinet, or become head of the IRS! (Tim Geithner).
The real cheating is very noticeable and easy to spot by anyone who is familiar with the tax system.
So take your time with your taxes and try to make it a learning experience. If you are working with a tax preparer, make sure that you are educating yourself well and asking good questions to make certain they are doing their job in order to maximize your deductions.