A straightforward guide to taking tax breaks and deductions on your 2011 tax return
Completely revised to reflect important changes in this year?s tax laws, J.K. Lasser?s 1001 Deductions & Tax Breaks 2012 will help you take advantage of every tax break and deduction that you may be entitled to. This comprehensive guide is 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.
Discusses deductions and tax breaks with regard to your family, home, car, job, investments, retirement, medical expenses, charitable giving, health coverage, and much more
Packed with hundreds of updated examples, practical advice, and real-world examples
Explains tax changes that are set to apply after 2011 that may affect your planning decisions
Includes a free online supplement at JKLasser.com, which contains up-to-the-minute tax law changes
Other titles by Barbara Weltman: J.K. Lasser?s Small Business Taxes 2012
Filled with in-depth insights and expert advice, J.K. Lasser?s 1001 Deductions & Tax Breaks 2012 is a book every taxpayer should own.
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Do the old clichĂŠs 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 ($3,700 in 2011). However, if a taxpayer is considered to be a âhigh-income taxpayer,â he or she loses some or all of this deduction.
Benefit
You can claim a deduction for yourself, called a personal exemption. In 2011, the exemption amount is $3,700 (each year it is indexed for inflation). Table 1.1 shows you the value of your personal exemption for your tax bracket in 2011 (the amount of taxes you save by claiming it).
Table 1.1 Value of Your Personal Exemption in 2011
Your Top Tax Bracket
Value of Your Exemption
10%
$ 370
15%
555
25%
925
28%
1,036
33%
1,221
35%
1,295
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 Tip
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.
Pitfall
If a parent waives the exemption for a child to enable the child to claim an education credit (see Chapter 3), the child cannot claim his or her own exemption.
Where to Claim the Personal Exemption
You claim the exemption directly on your tax return in the âTax and Creditsâ section of Form 1040 or the âTax, Credits and Paymentsâ 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 ($3,700 in 2011) is allowed to every taxpayer who supports another person and meets other tests described later. The deduction is called a dependency exemption.
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 2011 is a deduction of $3,700.
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 âConditionsâ section)
4. Joint return test (see end of âConditionsâ 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) and children of siblings (nieces and nephews who are younger than you). 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 later.
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 househ...
