J.K. Lasser's 1001 Deductions and Tax Breaks 2009

Your Complete Guide to Everything Deductible

Barbara Weltman

• Publisher: Wiley
• Year: 2009
• ISBN:
  9780470439364
• Edition: 6
• Topic: Personal Development
• Subtopic: Personal Finance

J.K. Lasser?s 1001 Deductions & Tax Breaks 2009 will help you take advantage of every tax break and deduction you may be entitled to. It's clearly organized by subject matter so you can easily find situations that may apply to you. Each tax benefit is also clearly explained–along with the eligibility requirements for claiming the benefit–while planning tips and common pitfalls associated with the benefit in question are discussed in detail. New tax law alerts are also included throughout the book, so you can make the most informed decisions possible.

CHAPTER 1

You and Your Family

Do the old clichés still ring true? Can two still live as cheaply as one? Are things really cheaper by the dozen? For tax purposes, there are certain tax breaks for building a family.

This chapter explains family-related tax benefits, including:

• Personal exemption

• Dependency exemption

• Child tax credit

• Earned income credit

• Dependent care credit

• Adoption costs

• Foster care

• Child support

• Alimony

For more information on these topics, see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information; IRS Publication 503, Child and Dependent Care Expenses; IRS Publication 504, Divorced or Separated Individuals ; IRS Publication 596, Earned Income Credit; and IRS Publication 972, Child Tax Credit.

Personal Exemption

Each taxpayer (other than someone who is another taxpayer’s dependent) automatically is entitled to a deduction just for being a taxpayer. The amount of the deduction, called the exemption amount, is a fixed dollar amount ($3,500 in 2008). However, if a taxpayer is considered to be a “high-income taxpayer,” he or she loses some or all of this deduction.

Benefit

You can claim a deduction for yourself, called a personal exemption. In 2008, the exemption amount is $3,500 (each year it is indexed for inflation). Table 1.1 shows you the value of your personal exemption for your tax bracket in 2008 (the amount of taxes you save by claiming it).

Conditions

There are no conditions to claiming this deduction; it’s yours because you are a taxpayer and the law says you are entitled to it.

Each spouse is entitled to his or her own personal exemption. On a joint return, two personal exemptions are claimed. If you are married but file a separate return, you can claim both deductions (an exemption for you and an exemption for your spouse) if your spouse has no income and is not the dependent of another taxpayer.

However, you cannot claim the personal exemption if you can be claimed as a dependent on another taxpayer’s return. For example, a child who is the parent’s dependent cannot claim a personal exemption on the child’s own return.

Planning Tips

If a parent waives a dependency exemption for a child, the child can then claim the exemption on his or her own return (the child is no longer treated as a dependent). This may be advisable, for example, when the parent cannot use an education credit because the parent’s income is too high, but the child can use the credit to offset his tax liability (see Chapter 3).

High-income taxpayers may lose some or all of their deduction for exemptions as explained below (see Pitfalls). But the phaseout of personal and dependency exemptions is being eliminated. The reduction of this phaseout, which started in 2006, is not fully in effect until 2010.

TABLE 1.1 Value of Your Personal Exemption in 2008

TABLE 1.2 Phaseout of Personal Exemption for 2008

Pitfalls

You may lose some or all of the personal exemption (as well as dependency exemptions discussed later) if you are a high-income taxpayer. The write-off for exemptions is phased out for taxpayers with adjusted gross income above a set amount; once AGI reaches a set level, no write-offs are permitted. Table 1.2 shows where the phaseout of exemptions begins and the AGI level at which no exemptions can be claimed.

Once your AGI exceeds the beginning of the phaseout range, the deduction for personal and dependency exemptions is reduced by 2 percent for each $2,500 of AGI over the beginning phaseout number. However, the phaseout is reduced by one-third. Use the Worksheet 1.1 to figure your limitation, if any, on exemptions you can claim.

Example

In 2008, you are single and have AGI of $285,000. Since your AGI is over the limit of $282,450, you cannot use any of your personal exemption. If your AGI is $221,200, your net exemption amount is $3,383.

You cannot claim any personal or dependency exemption for alternative minimum tax (AMT) purposes, a shadow tax system designed to ensure that all taxpayers pay at least some tax. A large number of exemptions can substantially reduce or even eliminate any regular tax. So if you have a large number of exemptions, you may trigger or increase AMT liability. You may wish to engage in some tax planning to minimize or eliminate your AMT liability.

WORKSHEET 1.1 Reduction of Exemption Amount

Where to Claim the Personal Exemption

You claim the exemption directly on your tax return in the “Tax and Credits” section of Form 1040 or the “Tax, Credits and Payments” section of Form 1040A; no special form or schedule is required. If you are filing Form 1040EZ, the exemption amount is built into the tax table (you can file this return only if you are single or married filing jointly with no dependents); you don’t have to subtract it anywhere on the return.

If your AGI exceeds the beginning of the phaseout range, use a worksheet in the instructions for the return to figure the phaseout of your exemption.

Dependency Exemption

A fixed deduction ($3,500 in 2008) is allowed to every taxpayer who supports another person and meets other tests described below. The deduction is called a dependency exemption. However, if a taxpayer is considered to be a “high-income taxpayer,” he or she loses some or all of this deduction.

Benefit

You may be entitled to a dependency exemption for each person you support if certain conditions are met. Like the personal exemption, each dependency exemption in 2008 is a deduction of $3,500.

Conditions

There are two classes of dependents: qualifying children and all other qualifying individuals. Different conditions apply to each class of dependents.

For a qualifying child, there are four conditions:

1. Being your child

2. Modified support test

3. Citizenship test (see end of “Conditions” section)

4. Joint return test (see end of “Conditions” section)

BEING YOUR CHILD

For purposes of a qualifying child, your children include your natural children, stepchildren, adopted children (including those placed for adoption), and eligible foster children (those placed with you by an authorized adoption agency or court). A qualifying child also includes grandchildren and brothers and sisters (including stepsiblings). The child must be under age 19, under age 24 and a full-time student, or permanently disabled (any age).

Your child must live in your household for more than half the year. A child kidnapped by someone other than a family member continues to be treated as a member of your household until the year in which he or she would have attained age 18.

MODIFIED SUPPORT TEST

A qualifying child must not have provided more than half of his or her own support (you do not have to show you paid more than half the child’s support). Amounts received as scholarships are not counted as support. There is no gross income test for a qualifying child as there is for a qualifying relative explained below.

Special rule for divorced or separated parents: The exemption belongs to the noncustodial parent if these conditions are met:

• The child receives more than half of his/her support from the parents.

• A decree of divorce or separation agreement between the parents states that the noncustodial parent is entitled to claim the dependency exemption or the custodial parent signs a written declaration that he/she will not claim the exemption.

If there is no divorce decree or separation agreement with a statement on the dependency exemption for the noncustodial parent or the custodial parent fails to sign a written declaration waiving the exemption, then a so-called tiebreaker rule applies. Under this rule the exemption belongs to the parent with whom the child resided for the greater amount of time, or if equal time, then to the parent with the higher adjusted gross income. Thus, the custodial parent will usually prevail because the child is a member of the custodial parent’s household for more time during the year than the child is a member of the noncustodial parent’s household.

There are five tests for cl...

Table of contents

• Title Page
• Copyright Page
• Introduction
• CHAPTER 1 - You and Your Family
• CHAPTER 2 - Medical Expenses
• CHAPTER 3 - Education Costs
• CHAPTER 4 - Your Home
• CHAPTER 5 - Retirement Savings
• CHAPTER 6 - Charitable Giving
• CHAPTER 7 - Your Car
• CHAPTER 8 - Investing
• CHAPTER 9 - Travel
• CHAPTER 10 - Entertainment
• CHAPTER 11 - Real Estate
• CHAPTER 12 - Borrowing and Interest
• CHAPTER 13 - Insurance and Catastrophes
• CHAPTER 14 - Your Job
• CHAPTER 15 - Your Business
• CHAPTER 16 - Miscellaneous Items
• APPENDIX A - Items Adjusted Annually for Inflation
• APPENDIX B - Checklist of Nondeductible Items
• Index