Last Minute 2011 Tax Return Checkup
For the most part, once the year ends, there is not much that you can do to affect the amount of taxes you will owe for 2011.
However, since the tax filing deadline is this coming Tuesday (for those of us living here in Massachusetts), there are a few last minute items I’d like to quickly call your attention to that may very well save you some money.
- Medical Expense Deductions: The first item on Schedule A is Medical Expenses. There are several deductions that many individuals overlook in this category including long term care insurance premiums, dental, Medicare, and Medicare supplement insurance premiums, and the cost of medical equipment in your home (even a humidifier purchased for a medical reason).The one that I really want to make sure that you’re aware of is traveling expenses to and from your doctor or any medical facility. For example, if you make frequent trips for treatment, etc., you can deduct 19 cents for every mile you travel whether you’re driving or not.
- Charitable Contributions: The rules for taking a deduction have changed over the last few years for charitable contributions. A donated item worth more than $500 can be deducted, but only if its value is documented by a qualified appraisal. And, that appraisal much be attached to the tax return.
- Standard Deductions: If you can’t itemize your deductions, don’t miss another $1,450 in deductions if you’re 65 or older. The IRS doesn’t automatically know how old you are unless you alert them. If you’re at least 65, make sure you check line 39a on your Form 1040.
If you’re at least 65 years of age, your standard deduction on your 1040 federal return increases from $5,800 to $7,250 if you’re single, and from $11,600 to $12,750 if you’re married.
Combine this with your personal exemption of $3,700 each and this brings the amount of “taxable” income you can receive before paying any taxes to $10,950 if you’re single and $20,150 if you’re married.
Obviously, if you can itemize, it’s substantially more.
- IRA Contributions: Last, but not least, is making a tax deductible contribution to your IRA which you can do all the way up to tax filing day for the prior year (i.e. April 17, 2012 if you live in Massachusetts). You want to make sure that you qualify to deduct the contribution. (Traditional IRAs only – There are no deductions for contributions to a Roth IRA)
Whether you may deduct the amount of your Traditional IRA contribution is determined by two factors:
- Were you an active participant in an employer sponsored retirement plan in 2011 (i.e. 401(k), 403(b), etc.)?
- If not, you can deduct 100% of your contribution
- Your ‘Modified Adjusted Gross Income’: If you were an active participant in an employer sponsored retirement plan, there are earnings limits, i.e. if you are married filing jointly, and your “modified adjusted gross income” is $90,000 or less, you may deduct 100% of your IRA contribution. In 2011, if you are 50 or older, that amounts to $6,000 per person.
If you can deduct your IRA contributions, there are big benefits because it reduces your Adjusted Gross Income (AGI), and there are several reasons why that’s a good idea:
- Medical expenses (as I mentioned above) are deductible only to the extent that they exceed 7.5% of your AGI, so lowering your AGI increases the potential to deduct expenses.
- Taxes on Social Security income: the less income you receive from sources other than social security, the less of your social security income that is subject to tax.
- Lower Medicare Part B premiums: beginning in 2007, “means testing” applies, and the amount of your medicare Part B premium is determined in part by your AGI on prior tax returns. If your adjusted gross income is above a certain cap, your medicare premium jumps substantially. Some Relaxing Retirement members reported to me that they got caught in this one this year, and thus will be paying the higher Medicare premium in 2012. Just another example of punishing your success.
Committed To Your Relaxing Retirement,
The Retirement Coach
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