Saturday, July 20, 2013

IRS Can Help You Look After the Kids

Most working parents are well aware they get a tax break to help cover the costs of sending Jimmy or Janie to day care. But some parents overlook the tax advantage of summer day camp costs.

During school vacations, many parents turn to these supervised programs to provide child care while they work. Overnight camps don't count, but the Internal Revenue Service says day camp expenses do qualify for this popular credit.

Regardless of whether you paid for after-class child care during the school year or a week of day camp during summer break, you can apply the costs to the child and dependent care tax credit and use it to cut your tax bill at filing time.

And while this credit also applies to care for dependents other than children, there are limits -- on what you spend as well as how much you earn -- that reduce the actual amount of the credit. Plus, you must make sure you and the person being cared for meet IRS eligibility guidelines.

In addition to summer day camp, here are some care services that are eligible for the credit.

Care services eligible for creditPrivate home nurses.Licensed dependent-care centers.Nursery school and kindergarten costs. In these cases, if the costs of school are separate from child care expenses, only the child care portion qualifies.Household help as long as the services are necessary for the well-being and protection of the qualifying individual.
Actual care cost limits

The first thing to keep in mind is that the credit probably will not pay for all of your child care costs. The IRS limits the dollar amount you can claim and you only get to count a percentage of that amount.

You can claim only up to $3,000 for the care of one person and $6,000 for two or more. Then this amount is further reduced based on your overall income (more on this later).

There is some good news, however. If you paid someone to watch over your two (or more) kids, you can combine all your care costs to reach the $6,000 limit.

In the case of Janie and Jimmy, their folks could count the $2,800 for Janie's care and $3,200 for Jimmy's in order to claim a total of $6,000, instead of only $5,800 by adding $2,800 plus $3,000. By using the total amount rather than splitting the actual costs and then applying the limits and figuring the credit, they'll get a larger tax break.

Percentage restrictions

The second limit is the percentage of costs that you can claim. Once you determine your allowable expense amount, your actual credit is limited to a percentage of that figure.

So regardless of how much you pay, the potential maximum child and dependent care credit is $1,050 (35 percent of $3,000) for the care of one person, twice that for two or more. Depending upon your income, the percentage range drops from 35 percent to 20 percent of your allowable care costs.

The 35 percent rate is only for lower-income taxpayers. If you make more than $15,000, the credit percentage is incrementally phased down by salary range until it hits 20 percent for those earning more than $43,000.

And even if your care costs come up to the maximum credit amount, you may not get it all if your tax bill is less than your allowable credit. The dependent care credit is not refundable, meaning it can only take your tax bill to zero. Any excess credit is not usable.

For example, if you claim a $1,050 maximum credit for the care of one child and owe $750, the IRS will use your credit to wipe out your tax bill, but you won't get the extra $300 as a refund.

Defining dependents

If you pay for child care, you can claim this credit to help offset some of your costs as long as your child meets IRS guidelines.

The youngster must be younger than 13. He or she also must meet the requirements set out in the IRS' dependent requirements. Basically, this means the child must be related to you and live with you most of the time. There are exceptions in the cases of divorced or separated parents, so read the tax filing instructions carefully or consult your tax adviser if this is your situation.

But the child and dependent care credit is not limited to child care costs. It also can be claimed when you pay for care of other dependents as they are deemed qualified by the IRS. For example, if you pay someone to look after your spouse or a dependent of any age who is incapacitated because of physical or mental limitations, you might be eligible for this tax break.

Only working taxpayers need apply

Then there's the credit's job catch. You can only claim dependent care that was necessary so that you can go to or look for work.

If you're married, the IRS requires both of you to be employed or seeking a job. The only exception is when one spouse is either a full-time student or is physically or mentally incapable of self-care.

After clearing the employment hurdle, other requirements to claim the credit include:

A filing status of single, head of household, married filing jointly or qualifying widow or widower with a dependent child. In most cases, married taxpayers who file separate returns cannot claim the dependent care credit.The payments for care cannot be made to someone you can claim as your dependent on your return or to your child who is younger than age 19.

To claim child and dependent care credit, complete and attach Form 2441 to your return. You must file taxes using either Form 1040 or Form 1040A to claim the credit.

Identify your caregivers

You also must include on the tax forms the name and taxpayer identification numbers of the caregivers.

If it's a business, the operator can provide you with the employer identification number. You also can use Form W-10, Dependent Care Provider's Identification and Certification, to request this information from the care provider. For individual providers, you generally use the person's Social Security number.

You might have some additional filing duties related to this credit depending upon who you hire and how you cover the costs.

If you pay someone to come to your home to provide the care, you may be considered a household employer and have to pay employment taxes.

Company benefit considerations

Finally, if you received any dependent care benefits from your employer during the year, you will have to complete Part III of Form 2441 or Schedule 2 to determine the amount of your credit. These amounts are listed in box 10 of your W-2.

Company benefits include money you receive directly from your employer or that was paid by your employer to your care provider. The fair market value of a company-provided day care facility also counts, as does money you put into a dependent care flexible spending account to pay care expenses.

For example, if your company provides untaxed dependent-care benefits directly to you, those amounts reduce the amount of expenses you can claim. If the company pays you $1,000 for child care costs, you must reduce your credit amount by that payment, so a $3,000 limit now becomes $2,000 to offset the company payments.

In the case of a spending account, if you paid $10,000 for a nursery school to look after your two children while you were at work, $6,000 is the maximum allowable credit amount. But you used $5,000 from your workplace flexible spending account to pay part of those costs, so the account money will reduce how much you can claim toward the child care credit -- the $6,000 maximum care expense amount is cut to $1,000.

In both these instances, because the workplace child care assistance is not taxable income to you, you cannot use those amounts to help further cut your tax bill.

More information on the credit is available in IRS Publication 503, Child and Dependent Care Expenses, or Chapter 32 of IRS Publication 17, Your Federal Income Tax.

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Are You Taking Enough Tax Deductions?

Even when anti-tax sentiment is running high, as it has been in recent times, Americans overwhelmingly accept the principle that filing an honest tax return is a civic duty.

Accountants say their clients often have a higher standard than the IRS requires. Some people will not itemize an expense when they cannot find a receipt, for example, even though not every tax deduction requires one. Estimates that conform to a "reasonable" standard are often adequate although some, like charitable deductions, must conform to a higher one.

Of course people are afraid of an IRS audit. But according to the 2012 Survey of Taxpayer Attitudes from the IRS Oversight Board, 86 percent say it's "personal integrity" that motivates them to be honest, and just 40 percent say they file faithfully out of fear of being caught doing something wrong.

To be sure, U.S. taxpayers don't skimp when it comes to claiming deductions. They list more than $1 trillion a year on tax returns. Still, accountants say they often miss obvious ones. Here are some ways people slip up:

Missing changes in tax laws. The tax code is not chiseled in stone like the Ten Commandments. In some years, there is not much new but in other years, the code can change significantly. The 2013 budget year was expected to bring big changes, but most were incremental. The top rate rises to 39.6 percent from 35 percent for the upper income bracket, which also faces higher dividend tax and a phase-out of tax deductions. Inheritance and gift taxes were added, but at relatively high thresholds. New or increased college tax credits and breaks for energy saving will soften the blow for many middle-income payers. Still, the tax code is as complex as ever.

[Read: Tax Time: Changes You Need to Know.]

"In general when people are preparing tax returns themselves, they not equipped to understand all of the changes in the law from year to year," says Gary DuBoff, managing director of accounting and financial planning firm CBIZ MHM.

Job-hunting expenses. With unemployment high, people are busy looking for jobs at all career stages. Even costs associated with an exploratory visit to a potential employer can be a deductible item. It's worth keeping track of all professional visits that might be considered job prospects. The IRS allows 56.5 cents per mile if you drive. But career re-inventors beware: One of the quirks of the tax code is that job searches outside your present line of work cannot be deducted.

Charitable work deduction. People at all ages, from teenage to retired, are doing more volunteering. Most people know to deduct contributions, but "a lot of people don't realize they can deduct expenses for their work," says DuBoff. They shrug it off as "just what I like to do." They can't deduct their time, but they can write off related costs such as transportation and supplies. You don't have to be a soup-kitchen volunteer to qualify. "Volunteering as a soccer coach or a class mom would also be a charitable work," says DuBoff.

Refinance point deduction. In this year's big wave of mortgage refinancing, most loans no longer require payment of points, the upfront interest charges assessed at the start of a home loan. But some people forget to take a deduction on points they still pay for previous mortgages, DuBoff says. When you extinguish your old loan, you repay remaining points all at once. That amount is entirely deductible.

Tax deductions vs credits. Not all tax breaks are alike. Be aware of the difference. A $500 energy tax credit might not seem like much, but it is what is known as an "above the line" item, meaning it lowers the amount of your tax bill on a dollar-for-dollar basis. Tax deductions are figured on your income tax rate. If you are in a 28 percent tax bracket, the tax deduction trims 28 cents from each dollar you deduct.

[Read: How Much Should I Contribute to My 401(k)?]

Childcare deductions and flexible spending plans. People often avoid this one because of the paperwork and hassle of paying "on the books" for a few hours of childcare here and there. But there are allowances that make it worth the effort. The childcare credit, an above-the-line item, reduces taxes by 20 percent to 35 percent of the first $3,000 spent for one child or $6,000 for two, depending on your income level. That credit can be used for parent care, too. The IRS also allows up to $5,000 for workplace flexible spending of pre-tax dollars for nannies, after-school care, and even day camps.

College and education. College costs are usually not deductible, but there are tax credits for tuition and a limited deduction for interest on student loans. Up to $2,500 in interest can be deducted if your income is under $75,000, or $155,000 for a joint return. A college credit of $2,500 for tuition and related expenses is available if your income is $80,000 or $160,000 for joint filers.

Retirement. One overlooked advantage of becoming self-employed, as many are in this era of non-retirement, is that you can use the SEP (Simple Employment Plan) to put 25 percent of your self-employment income up to $50,000 into a tax-advantaged employment plan. People who have had workplace plans often forget to set up their own. "That's a big mistake," says DuBoff. "It's a great chance to put more away."

[Read: 2 Simple Steps to Make Your Retirement Savings Leap.]

Tax deductions on taxes. Amid federal budget cuts in recent years, state taxes are picking up a larger share of the tax burden. Those payments are deductible. In states that do not have income taxes, sales taxes can be deducted. Even if you live in a state with an income tax, you might be able to opt to take the deduction for the sales tax paid. The purchase of a boat or a car in some states might generate sales tax that creates a larger deduction than income tax.

Storm expenses. Hurricanes Sandy and Isaac caused billions of dollars of devastation in the eastern United States. Storm damage can be a deductible item if it amounts to 10 percent of adjusted income. If you reside in an official federal disaster area, you can deduct those costs over a two-year period going back two years.

Beyond the fact that it's the right thing to do, being honest is a good guide. But tax codes are sometimes illogical. For example, there are virtually no tax breaks for people attempting career changes, but many for career advancement. So honesty and logic alone will not be enough. When in doubt, consult.

"If you are entitled to a deduction, I firmly believe you should take it," says DuBoff. "Even if you do not have a record of every expense, a reasonable estimate can work. But it can't be frivolous or way out of line." With the IRS increasingly relying on algorithmic filtering of electronic returns, those outliers quickly draw attention.

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Many Early Tax Filers Still Waiting for Refunds

More than three months after rushing to file their taxes early, some filers still haven't received refunds from the IRS.

Taxpayers claiming education credits on Form 8863 encountered their first delay when the IRS said it wouldn't be able to start processing the forms until mid-February because it needed to update its systems. Then, on March 12, the IRS said several tax software providers erroneously filed more than 600,000 returns containing the 8863 form --resulting in delays of up to six weeks from the date they were filed.

That meant most of these filers were expecting refunds by the end of March or beginning of April at the latest.

But since then, hundreds of angry comments have been posted on Facebook and other online tax forums from filers who claim they still haven't received their refunds.

"Sooooo effing angry!!!! Still processing three months now no update," one member of the Club 8863 Facebook group wrote last week.

"Still waiting I've had no changes since feb. starting to getting mad bc I was told I would definitely have it by April 22 and then that changed to May 6. And now nothing," wrote another filer. Another woman said her electricity was going to be shut off unless she gets the money soon.

Jolee Singleton, from Lakeland, Fla., filed her taxes on Feb 14. She said she made sure to get them in as soon as possible because she needed the $1,000 refund for rent and car payments as she searched for a full-time job. But after calling the IRS every week to check in on the status, she's still waiting. In the meantime, her truck was repossessed because she couldn't keep up with payments, and she doesn't start her new job until next week.

"When you owe the government money they want it right away. When they owe you money, they are not in a hurry," she said. "I have almost lost my house too, and will soon if I don't get my refund."

H&R Block, one of the software companies that acknowledged it was encountering issues filing returns in March, said in late April that 90% of its impacted customers have now received their refunds. The 10% who still haven't may have been flagged by the IRS for other reasons, the firm said. To apologize, it sent $25 vouchers to impacted customers who filed in H&R Block-owned locations.

But that's not enough for some filers -- even those who finally did receive their refunds. Kathleen Fisher, who has been an active member of the Club 8863 Facebook group and helps taxpayers get in touch with local officials and the Taxpayer Advocate Service, the watchdog arm of the IRS, said people paid hundreds of dollars in tax preparation fees so getting a mere $25 back is an insult.

Some taxpayers' filing fees have already been put into collections because they aren't able to afford them without their refunds, while others took out refund anticipation loans and are paying steep interest as they wait for their refunds -- which they needed in order to pay off the loans, Fisher said.

The IRS wouldn't say how many Form 8863 filers still haven't received their refunds, but it said a small group may have been impacted by additional issues that the IRS was continuing to work on -- and that these returns have finally been processed.

"A small additional set of returns with education credits cleared our review process in recent days. As a result, these taxpayers should start seeing their refunds or refund dates shortly -- assuming there are no other issues with their tax returns," the IRS said in a statement.

As these people anxiously watch their mailboxes or bank accounts for that direct deposit from the IRS, nearly 98 million taxpayers have already received refunds, according to the latest IRS filing statistics. The IRS says that most refunds are issued in less than 21 days, and the average refund is $2,657 -- down slightly from last year's average refund of $2,716.

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Taking Advantage of Miscellaneous Deductions

Every tax season, frantic filers search for ways to reduce the checks they must write to Uncle Sam. A proven tax strategy is deducting as much as possible.

But sometimes, technically deductible expenses are wasted because they don't meet other Internal Revenue Service rules. This is often the case for most of the miscellaneous deductions found on Schedule A.

The roadblock preventing the write-off of these assorted expenses is the requirement that they total more than 2 percent of the taxpayer's adjusted gross income, or AGI. That means a taxpayer with $50,000 in AGI must come up with more than $1,000 in miscellaneous deductions before they do him or her any tax good. Even then, just the amount over $1,000 is deductible. So the 50-grand filer with $1,750 in tax-allowable miscellaneous expenses can only deduct $750, not the full $1,750.

While the 2 percent limit is tough for many filers to reach, it's not impossible. You just need to know exactly what the IRS considers as allowable miscellaneous deductions. The expenses fall into three general categories: unreimbursed employee expenses, tax preparation fees and "other" expenses.

Unreimbursed employee expenses

Remember that copier toner you bought that Saturday you had to work and the office machine ran dry? What about that fee you paid to become a notary public, a designation requested by your boss to speed up the flow of official documents? If you never got reimbursed for these costs, they could help reduce your personal tax bill as a miscellaneous deduction.

The IRS says you can deduct these expenses you paid out of your own pocket as long as they were required to do your job as an employee and were "ordinary and necessary" to your business or trade. An expense is ordinary if it is common and accepted in your type of business; it's necessary if it is appropriate and helpful to you in doing your job.

Because you have that percentage target to meet, be thorough here. Most taxpayers know to count the price of professional journal subscriptions and business-related meals and entertainment, but other items the IRS says you can deduct are the costs of work-related classes, legal fees and licenses. Don't overlook the price of job-required uniforms that you bought (and that aren't suitable as general attire), as well as amounts you paid for employer-required medical examinations. Even the fee to obtain the passport you needed for that overseas business trip is deductible here.

Certain home-office expenses also might count, as long as the residential workspace is for the convenience of your employer and not just to save you some commuting time. And don't forget about depreciation on personal computers you use for work. These, too, must be for your boss's convenience and required as a condition of your employment.

What if you've had it with your job and all its ancillary costs? You can deduct as miscellaneous expenses the amounts you spent looking for other employment in the same field.

Some of these expenses require you to fill out an additional tax form, schedule or work sheet. But when you get the final amount that you can deduct, report it on line 21 of Schedule A.

Tax-preparation fees

If collecting all your potential work-related deductions prompted you to seek tax help, then the IRS has a tax break for you here. And you don't have to hire a CPA to get this deduction.

You can deduct the cost of tax-preparation software, tax publications and even costs for associated tax-filing duties, such as copying your returns or paying for return-receipt postage or overnight delivery when you mail them.

If you choose electronic filing, any fee you paid for that service is deductible here. The IRS now even lets you deduct the convenience fee you were charged when you paid your e-filed taxes by credit card.

Just remember, you deduct your tax-preparation expenses for the tax year in which you paid them, not the tax year for which you are filing. So on your 2012 return, you count the tax-related costs you incurred last year to prepare your 2011 taxes. Any expenses you fork over now to complete your current return will count when you file your 2013 forms next year.

Once you've totaled your tax-prep costs, enter them on line 22 of Schedule A.

Other miscellaneous deductions

The final 2 percent deduction category is "other" expenses. For most taxpayers, these are costs to produce or collect income, such as investment-related fees, or to manage or maintain property that provides you with some extra earnings.

For the IRS to accept these deductions, the expenses must be "reasonably and closely related to" a taxpayer's income-producing efforts. Some common expenses that meet this requirement are clerical help in caring for investments, depreciation on home computers used to track and manage investments, and the fee for a safe-deposit box in which you keep investment data. If, however, your bank box holds only jewelry and other personal items, or even tax-exempt securities, the box rental fee is not deductible.

You also can write off several investment-related fees that, while small, could add up. They include service charges on dividend reinvestment plans and trustee's fees you paid for your IRA. Just make sure your retirement account fee is billed separately rather than included as part of your account's general management costs, and that you pay it separately.

Even costs associated with a recreational activity could come into play. Take, for example, an amateur photographer who snaps shots of graduations or weddings for the neighbors and gets a few bucks in return. The shutterbug can deduct camera-related expenses as a miscellaneous expense as long as the amount isn't more than the payments he or she got. The IRS frowns on using hobby expenses to reduce taxes.

All allowable "other" miscellaneous deductions are entered on Schedule A's line 23. Then all three category amounts (lines 21, 22 and 23) are totaled. Unfortunately, because of the AGI percentage limit, that's not what you can deduct.

Maximizing miscellaneous deductions

Now you must take your AGI (from line 38 of your Form 1040), multiply it by 2 percent and enter the amount on line 26 of your Schedule A.

If that income percentage is more than your miscellaneous deductions total, you're out of tax-deduction luck. You can't claim any of the expenses. But if your fractional AGI amount is less, subtract it from your miscellaneous deductions total -- the remainder is what you can claim as an itemized deduction.

In addition to your Schedule A calculations, you might have to complete additional tax forms or work sheets to claim some of these miscellaneous expenses. You can find a complete list of the IRS-approved deductions (and those that aren't OK), as well as the other tax paperwork each might require in IRS Publication 529, Miscellaneous Deductions. But if the extra paper gets you over the 2-percent-of-AGI hurdle, the time spent is probably worth it.

And what if your miscellaneous efforts fell a bit short this filing season? Then set up a deduction bunching strategy now to guarantee that future sundry expenses aren't wasted. This is simply bunching, or gathering your expenses into one tax year, rather than spreading the costs over several. By doing so, you often can accumulate enough expenses to exceed the deduction threshold.

For example, renew your business subscriptions in December instead of January, or prepay your professional association dues early. This will help turn "nearly" deductible expenses one year into full-fledged tax breaks the next filing season.

The only downside of this plan is that it usually helps you out only every other year. When you push expenses into one year, you generally will find yourself short of the itemized deduction percentage requirement the next year. But getting the breaks on alternate tax filings is still better than missing out on them every year.

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13 Surprising Facts About Your Taxes

Paying taxes is on everyone's mind, rarely in a good way. Knowing some pithy facts about our tax system and how you fit in may not make you feel any better. Still, as you embark on your own annual tax odyssey you might be surprised about who pays what, who doesn't pay, and how you fit in according to recent IRS statistics. It could even help you plan.

1. The IRS receives over 140 million individual tax returns and collects over $950 billion in taxes.

2. The biggest tax deductions are those for taxes paid to state and local governments. Next biggest are for interest, especially on home mortgages.

[More from The Highest State And Local Income Taxes On A $1 Million Income: Post Election 2012]

3. The average tax refund is almost $3,000, $2,953 to be exact. In all, over $325 billion in tax refunds are paid out. Tax refunds are great, but really suggest you were having too much withholding taken out of your pay or you made estimated tax payments that were too large. Tax refunds are like interest free loans to the government.

4. Many returns--4 million--report alternative minimum tax (AMT). You compute your regular tax and your AMT and pay whichever the more. Despite recent reforms, AMT plagues taxpayers. Many things--like most attorney fees--are deductible for regular tax but not for AMT. That hurts.

5. Want to be in the top 1% of earners nationally? You’ll need $369,509 of annual income to join that group. If you aim to be in the top 10% of income earners, you'll only need $116,555. That means 90% of taxpayers make less.

[More from Companies That Pay CEOs More Than Uncle Sam]

6. Making a million dollars is a nice goal, but roughly 7,000 millionaires didn’t pay any income tax in 2011. In all over 275,000 returns showed adjusted gross incomes of $1 million or more.

7. California has the most millionaires. More than 40,000 Californians reported over $1 million in income. Vermont has the least--less than 300 millionaires.

8. Want to aim really high and try to crack the $10 million mark? More than 11,000 individual tax returns reported adjusted gross income above $10 million.

9. E-filing is now nearly universal. Almost 90% of individual tax returns are now e-filed.

10. Who uses paid tax preparers? More than half of returns--about 57%--are done by paid preparers.

11. If you don't itemize and claim the standard deduction, you might want to know that the average standard deduction is $7,000 to $8,000. ($7,884).  Itemizers on average claim $26,084.

12. Our tax code is wordy, about 4 million words. It's always changing, too. Since 2001 alone, there have been more than 4,500 changes.

[More from 15 Ways To Invite An IRS Audit]

13. As a percentage of adjusted gross income, people earning $100K-$200K pay an average federal tax rate of only 12%. Those earning $200K to $500K pay 19.6%. Don't confuse marginal rates with average rates. The former is what you pay on your very last dollar.

Robert W. Wood practices law with  , in San Francisco. The author of more than 30 books, including Taxation of Damage Awards & Settlement Payments (4th Ed. 2009 with 2012 Supplement,  ), he can be reached at  . This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

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The Most Expensive Tax Breaks

The January 2013 fiscal cliff tax deal raised tax rates for the wealthy, but Washington continues to look at limiting tax breaks – either to raise more revenue or to reform the tax code and lower tax rates, or both. Here are the most expensive “tax expenditures” benefiting individuals, based on the Joint Tax Committee’s estimates of what they’ll cost Uncle Sam in 2013 through 2017. The list includes not only deductions and income exclusions, but also refundable credits and subsidies that are wholly or partly delivered through the tax code and IRS.

1. Employer Paid Health Insurance
Five year cost: $760 billion

If a company provides you with health insurance or health care, it can deduct the cost from its taxable income. But the value of the premiums or care is not counted as income to you, even though it may now, confusingly, show up on your W-2 (in box 12, Code DD). Beginning in 2018, the value of certain high-cost “Cadillac” health insurance plans will be subject to a premium tax, but even that tax won’t be levied directly on individuals.

[More from Forbes: 15 Ways To Invite An IRS Audit]

2. Lower Rate For Capital Gains, Dividends
Five year cost: $616 billion

Qualified corporate dividends and capital gains on stock and certain other investments held for more than a year are taxed at a top 20% rate, compared to a 39.6% rate for ordinary income such as salary and taxable bond and CD interest. Among the biggest tax expenditures, the benefit of this one skews the most to the rich.

3. State And Local Tax Deductions
Five year cost: $431 billion

Taxpayers who itemize can deduct state income or sales tax, plus taxes on personal property. The tally for that is $278 billion. Itemizers can also deduct real estate taxes on their homes – another $153 billion over the five years.

4. Mortgage interest deduction
Five year cost: $379 billion

Taxpayers can deduct interest paid on mortgages totaling up to $1.1 million used to buy or improve a primary home and a secondary or vacation home. A yacht with a berth, galley and head can count as a second home. The $379 billion doesn’t include other breaks for housing, such as the exclusion from income of up to $500,000 per couple in capital gains from the sale of a principal residence, which will cost $130 billion over the next five years.

5. Tax Free Medicare Benefits
Five year cost: $358 billion

All Medicare insurance benefits are excluded from taxation. To the extent that the value of that insurance exceeds the premiums senior pay and the amount they have contributed in Medicare taxes during their working years, the value of Medicare is considered untaxed income to them.

[More from Forbes: 10 Ways To Become A Victim Of Tax Identity Theft]

6. Workplace Retirement Saving Plans
Five year cost: $336 billion

This number includes the exclusion from taxable income of employer and employee contributions to 401(k)s and other employer sponsored retirement savings plans, as well as the exclusion of earnings in these accounts. It doesn't include the additional $64 billion cost for retirement plans for the self employed or the $212 billion cost for traditional, employer paid “defined benefit” pensions – the kind that pay a set amount each month.

7. Earned Income Credit
Five year cost: $326 billion

This credit is available to low income working families; the maximum credit in 2013 for families with three or more children is $6,044. The credit is refundable – meaning families can get back more from the credit than paid in taxes. Of the $326 billion, $283 billion will be made up of such refunds.

8. Child Credit
Five year cost: $292 billion

This $1,000 credit for each child under 17 begins to phase out once a couple’s modified adjusted gross income exceeds $110,000 or a single parent’s MAGI exceeds $75,000. The credit is partially refundable – meaning families can get back more from the credit than they paid in income tax. Of the $292 billion cost, $154 billion comes from such refunds.

Full List: The 15 Most Expensive Tax Breaks

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Friday, July 19, 2013

As Tax Day Approaches, Identity Theft a Growing Threat

The recently released flick Identity Thief, starring Jason Bateman and Melissa McCarthy, may be a slapstick comedy, but for millions of Americans, identity theft isn't something to laugh about. The crime is increasingly reeking havoc not just on their credit scores, but their tax returns as well, delaying refunds and creating other headaches.

The IRS reports that the number of its criminal investigations into identify theft has nearly tripled, from 276 in fiscal year 2011 to 898 in fiscal year 2012. Some identity thieves file hundreds or even thousands of returns using tax software.

Jim Kealing knows these frustrations firsthand. The Valencia, Calif.-based certified public accountant says his clients haven't encountered tax-related identity theft over his 30-year career. However, the same can't be said of Kealing and his wife. Someone in Miami filed the couple's 2010 tax return using Kealing's Social Security number, and the IRS flagged their joint return as a duplicate. Kealing didn't discover the problem for more than a year, and it took about nine months to clear up the issue. Fortunately, he wasn't expecting a refund, which could have been delayed for months.

[See Avoid These 10 Common Tax Mistakes.]

Neal O'Farrell, executive director of the California-based Identity Theft Council, says identity thieves steal Social Security numbers in a variety of ways: breaking into mailboxes, homes, or cars, buying customer records from disgruntled employees, or having their significant other get a job at a law firm or doctor's office, where records may be easily accessible. "Our biggest worry is the case that we saw called Operation Rainmaker, where street-level drug dealers left the corners and took classes on how to file [tax returns] using TurboTax," O'Farrell says. Ultimately, law enforcement arrested 49 people involved in the operation and recovered $5 million in fraudulent refunds, cash, and other assets in Tampa.

Fraudulent filers are also becoming more sophisticated in their efforts to avoid detection. "They're putting more effort into the filing and making it look more genuine," says O'Farrell. For example, he says, "They'll do more research on the victim and make sure they have the right number of dependents."

In addition to filing phony returns, some fraudsters use stolen Social Security numbers to evade taxes. "Information is sold on a black market to individuals who might have difficulty gaining lawful employment in the U.S.," says Joe Reynolds, identity-fraud product manager for Hartford, Conn.-based insurer Travelers. "They'll fill out the employment application and put your Social Security number down. They'll work and choose not to have taxes deducted from their income. Then the IRS says, 'but we see that you earned income from XYZ job,' so they've deferred that tax liability back to you."

How to tell if it's happened to you. Reynolds says most consumers find out there's an issue through a letter from the IRS or a denial of Social Security benefits. "If you get an email from the IRS, you should immediately be on the alert," he says, adding that you may be a target of a phishing scam if such a message arrives in your inbox. "The IRS never communicates with taxpayers about specific tax returns via email."

Also keep an eye on your mailbox to make sure you're getting forms like 1099s and W4s as expected. "A lot of employers will provide that information electronically," Reynolds says, adding that it's a smart idea to file early if you can and use certified mail to confirm your tax return's arrival (unless you're e-filing.)

[Read: The 8 Most-Missed Tax Deductions and Credits.]

In some cases, fraud rings set up tax-preparation services as a front, so be vigilant in choosing an accountant or tax preparer. "Make sure they have a good reputation with the Better Business Bureau," says Reynolds. "When you find the right accountant, ask them lots of questions about how they're protecting your personal information. They should have a personal privacy policy that extends to their employees."

Also make your personal information difficult to find in the event your car or home is burglarized. "Burglars are the new digital criminals," says O'Farrell. "They're much more interested in your Social Security number than your flat-screen TV, and they could have it written on the palm of their hand without anyone knowing."

If you believe you've been the victim of tax-related identity theft, your first step is to notify the IRS. Then, if you've worked with an accountant, contact him or her. You may also want to file an identify theft affidavit with the Federal Trade Commission.

[See Tax Time: Changes You Need to Know.]

Unfortunately, sorting out an identity-theft issue with the IRS can take months, as Kealing attests. "I probably talked to five different people at the IRS," he says. "It's going to take a while and you have to wait for them to resolve the identify-theft issue before you can move forward."

Unfortunately, once you've worked things out with the IRS, the attacks may not end there. If an identity thief has your information, be on the lookout for other issues with your Social Security, credit cards, or bank accounts by checking your statements regularly. You may want to use your identity theft affidavit to get a free credit freeze so no one can open new accounts in your name; you can temporarily unfreeze your credit if you'd like to open a new account yourself (sometimes for a small fee).

"Once your Social Security number is out there, you're probably going to be fighting this forever," says O'Farrell. "One of the biggest costs of identity theft is the fear of what's going to happen next."

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What the Odds Are That Your Tax Return Will Be Audited, and What to Do If It Is

Overall, the odds are reassuring. The vast majority (99%, in fact) of individual income tax returns skate safely past the IRS audit machine.

Better news: The 1-in-100 chance of being called on the carpet really overstates the severity of the situation. Fully 70% of all audits are handled by mail, not by mano a mano combat with an IRS agent. And, if your return doesn't include income from a business, rental real estate or a farm, or employee business expense write-offs, the basic 1-in-100 chance of being challenged jumps to 1-in-250.

Another piece of rarely reported good news: Each year, tens of thousands of taxpayers walk out of an audit with a check from the government. In 2011, for example, 66,381 audits resulted in refunds totaling over $1 billion.

[TOOL: Calculate Your Risk of an IRS Audit]

The 1-in-91 chance of being audited is the overall average. Your actual odds turn on the kind of return you file and the type of income you report.

Our calculator, based on official IRS data on returns audited in 2012, will give you a good idea of the odds that your personal 1040 (or 1040-A or 1040-EZ) will be selected for review — either by mail or in person. And, remember, even if it is, there's a 1-in-7 chance you'll walk away unscathed or be one of the lucky ones whose audit results in a refund.

With few exceptions, of course, the IRS doesn't randomly choose which returns to audit. The few thousand random reviews each year are performed to help the IRS calibrate the computers that identify the juiciest targets.

Over the next few months, the IRS will be plugging data from more than 140 million tax returns into a computer that scrutinizes the numbers every which way and ponders how the picture you paint of your financial life jibes with what it knows about other taxpayers. The computer tries to spot returns that are most likely to produce extra tax if put through the audit wringer. The computer's choices are reviewed by a human being who can overrule them if, for example, an attachment to your return satisfactorily explains the entry that set the computer all atwitter. Short of such a veto, your name will go on the list.

Even if your return survives the computer's scrutiny, you're not necessarily safe. You may have listed an investment in a tax shelter the IRS is particularly interested in, for example, or the agency might decide to take a closer look at your return because it smells of the latest scam du jour identified by the IRS.

And there's always the chance that someone has fingered you as a tax cheat. The IRS encourages such tips and even pays a bounty for leads that pay off in extra tax.

Don't Panic

Whatever the reason you're chosen for an audit, it's chilling to get the word that the IRS wants to examine your return. After all, everyone knows that the IRS was able to do what J. Edgar Hoover and all the G-men of the FBI couldn't do: put Al Capone behind bars. Even if you have no reason to think you did anything wrong, you can't escape the anxiety that accompanies an audit notice. For one thing, the return being audited is unlikely to be the one you just filed. A lot of taxpayers are only now hearing from the IRS about their 2011 returns ... and some 2010 returns are just coming up to bat. (Generally, the IRS has three years from the due date of your return — until April 15, 2016, for 2012 returns — to initiate an audit.)

How It All Begins

You'll get a letter announcing your fate. The simplest audit — a correspondence audit — requires only that you mail in the records needed to verify a specified claim on your return. In a field audit, an IRS agent comes to your home or place of business to go over your records. Most common, though, are office audits, which involve getting yourself to a local IRS office. You'll probably have at least a couple of weeks to prepare. If the appointment is set for an inconvenient time or you find that you'll need extra time to pull your records together, call the IRS promptly to request that the audit be rescheduled.

[More from Kiplinger: 12 IRS Audit Red Flags]

The written notice will identify the items on your return that are being questioned — usually such broad categories as employee business expenses or casualty losses — and outline the types of records you'll need to clear up the matter. Office audits are usually limited to two or three issues, so you won't be expected to haul in all your records. What kind of evidence do you need? Here's how a retired IRS official with 30 years of auditing experience answered that question: "I expect to see the records you used when you prepared the tax return. You must have had some. Otherwise, how did you know you gave $5,000 to charity?"

Also, beware that auditors are sometimes looking for more than proof of what's on your return. They're also interested in whether income that should have been reported was left off. That could mean a review of your bank records, for instance, in search of deposits that might represent unreported income.

Audit Yourself

The best way to begin preparing for your meeting is to pull out your copy of the return being audited. Before the IRS puts your forms to the test, do the job yourself. Pore over the items being questioned and pull together the documents that support your entries. Of course there will be gaps, but don't automatically concede defeat. Try to reconstruct missing records.

If, as luck would have it, you can't find the return, call the IRS office that contacted you and ask how to get a copy.Get copies of canceled checks from the bank or duplicates of receipts or written statements from individuals who can back up your claims.If you can't come up with written evidence for certain entries, prepare an oral explanation.
Your records needn't be perfect. If you can reasonably explain how you came up with a figure that's not fully corroborated by the evidence, the IRS may well accept it. The IRS likes to stress how reasonable audit personnel are. However, when you're pulling together your records, remember this: The more thorough your documentation is in general, the more likely an auditor will cut you some slack on an occasional point.

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The Best Tax Breaks for Retirement Savers

The federal government encourages saving for retirement by giving tax breaks to people who save in specific ways. There are several types of tax perks for retirement savers, each with special rules and restrictions. Here are some of the best tax breaks available to people who save for retirement:

401(k). One of the best ways to get a tax deduction while you save for retirement is through a 401(k) or similar type of retirement account, like a 403(b) or the federal government's thrift savings plan. Employees who are eligible for these workplace retirement accounts can defer income tax on up to $17,500 in 2013, $500 more than in 2012. And people age 50 and older can delay paying income tax on as much as $23,000 in 2013, $5,500 more than younger people. Income tax won't be due on your contributions until you withdraw the money, which you are required to do beginning after age 70 1/2. Traditional 401(k)s generally work best for people who expect to be in a lower tax bracket in retirement than they are now. "You get the employer match and tax-deferred growth, and you get to take it out when your taxes are theoretically going to be lower," says John Dulmage, a certified financial planner for Financial Pathways in Londonderry, N.H.

[Read: Retirement Tax Deadlines for 2012.]

Roth 401(k). Roth 401(k) contribution limits are the same as those for traditional 401(k)s, but the tax treatment is different. Roth accounts allow you to contribute after-tax dollars, and then withdrawals from the account, including the earnings, are tax-free in retirement. Employers are increasingly offering a Roth option, and even allowing workers to convert some of their existing retirement savings to a Roth by paying income tax on the amount converted. A recent Aon Hewitt survey of 300 large U.S. employers found that about half of these companies already offer a Roth account and 29 percent of those without a Roth option are planning to add this feature in the next 12 months. Roth accounts often produce the biggest rewards for young and low-income retirement savers. "I usually recommend that my clients who are in the 15 percent tax bracket use the Roth as the vehicle," says Dulmage.

IRA. Workers can defer income tax on up to $5,500 by contributing to an IRA in 2013, which jumps to $6,500 at age 50 or older. However, the ability to claim this tax deduction is phased out if you have a retirement plan at work and a modified adjusted gross income between $59,000 and $69,000 in 2013 ($95,000 and $115,000 for couples). For investors who don't have a workplace retirement plan but are married to someone who does, the deduction is phased out if the couple's income is between $178,000 and $188,000 in 2013. IRAs generally give you more investment options than a 401(k), and savvy investors can seek out lower fees. "If you have a lot of funds in your 401(k) that have high expense ratios of 1 percent or above, then the best bet is to go with the IRA where you can invest in practically anything you want to," says Kirk Kinder, a certified financial planner for Picket Fence Financial. And while the deadline has already passed to make 401(k) contributions that count for the 2012 tax year, you have until April 15, 2013, to make an IRA contribution that will get you a tax deduction on your 2012 tax bill.

[Read: How to Claim the Retirement Saver's Tax Credit.]

Roth IRA. You can prepay income tax on up to $5,500 ($6,500 at age 50 or older) in a Roth IRA. The ability to contribute to a Roth IRA is phased out for individuals and heads of household earning between $112,000 to $127,000 ($178,000 to $188,000 for couples) in 2013. However, people who earn above these limits may still be able to contribute to a Roth IRA by converting some of their traditional IRA assets to a Roth. Roth accounts give retirees flexibility in retirement because withdrawals are not required during the original account owner's lifetime. "There are no strings attached to when the money comes out," says Philip Watson, a certified financial planner for Watson Planning in Franklin, Tenn. "You don't have to take the money out in your lifetime. You can pass a Roth to your heirs."

IRA tax-free charitable contributions. Individuals age 70 1/2 and older are generally required to withdraw money from their traditional IRAs and pay income tax on each distribution. But retirees in the fortunate position of not needing the money they have stashed away in their IRA can avoid paying income tax on their required withdrawals by donating up to $100,000 of their distributions to charity. To qualify for the tax break, charitable distributions for 2013 must be paid directly from the IRA to a qualified charity by the end of the calendar year.

[Read: Understand Your Rollover Options.]

Saver's credit. Low- and moderate-income people who save for retirement in a 401(k) or IRA are eligible to claim the saver's credit, which can be worth up to $1,000 for individuals and $2,000 for couples. People age 18 and older who are not full-time students or dependents on someone else's tax return can claim this tax credit until their income exceeds $29,500 for singles, $44,250 for heads of household, and $59,000 for couples in 2013. The credit is calculated based on up to $2,000 of retirement account contributions and your income, with the biggest tax credit going to retirement savers with the lowest incomes. For example, a married couple earning $30,000 that contributed $1,000 to an IRA would get a $500 credit. But few people get that much. Among the 6.1 million income tax returns that claimed the saver's credit in 2010, the credits averaged $204 for couples, $165 for heads of household, and $122 for individuals. There's still time to claim the saver's credit on your 2012 tax return. Workers have until April 15, 2013, to make an IRA or Roth IRA contribution that will qualify them for a tax-year 2012 saver's credit.

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The 8 Most-Missed Tax Deductions and Credits

It's hard to believe we are going into the home stretch of the 2012 tax season. With not much time left, taxpayers often make mistake, as they begin to scramble to quickly get their taxes done or are not aware of tax deductions and credits and leave money on the table.

Here are eight of the most-missed tax deductions and credits:

1. Dependent exemptions. Exemptions for dependents are $3,800 per dependent, but individuals often don't take it. Why? Because they don't realize their relative they've been supporting or their friend that's been sleeping on the couch may be claimed as a "qualifying relative," which may entitle them to a tax deduction.

2. Earned Income Tax Credit. The Earned Income Tax Credit is for low to middle-income wage earners that has lifted nearly 7 million people out of poverty. However, the IRS estimates 20 percent of eligible workers and their families miss out on this valuable credit. You have to file your taxes to get this tax credit, but oftentimes many think they don't make enough money to file their taxes. Not claiming the Earned Income Tax Credit can cost a family with three dependents a credit worth up to $5,891.

3. Child and Dependent Care Credit. Children can be expensive, but the IRS has some relief. If you work and pay for child care for your dependents under 13 years old, you may be able to qualify for a deduction of up to $2,100. You can even deduct the cost of summer camp. Summer was long ago, but don't forget this tax deduction.

4. State Sales Tax Deduction. You usually get a choice between deducting state income taxes paid or state sales tax, depending on which expense gives you the largest tax deduction. If your state does not have state income taxes, then the option to choose the state sales tax is beneficial to you. Even if you pay state income tax, if you purchased some big ticket items in 2012 you may keep more money in your pocket by choosing to deduct the state sales taxes paid.

5. Charitable donations. You would be surprised how much individuals donate to charity every year without ever thinking about how much money they could save at tax time. Many taxpayers have contributions to charitable organizations deducted from every paycheck, but they forget to include that as a charitable donation when preparing their taxes.

Don't forget about your out-of-pocket expenses while traveling to volunteer at the local soup kitchen. You can deduct 14 cents per mile plus parking and tolls for travel directly related to charity work. Spring and Fall cleaning are a yearly ritual, but we often forget donations of non-cash items like clothing and household goods are tax deductible. Looked at individually, these may seem small, but these tax deductions can add up.

6. Job-search expenses. If you were looking for a new job in 2012, you may be able to deduct costs related to job search, such as the cost of resumes, employment agency fees, postage, and even travel expenses--as long as the expenses are directly related to your job search and the positions you sought were in the same line of work as your previous job.

7. Moving expenses. Even though job-hunting expenses for your first job are not deductible, you can deduct your moving expenses for your first job. Your job must be at least 50 miles away from your old home. If you meet the time and distance test, you can deduct the cost of getting yourself and your household goods to the new area. You can even deduct the cost of moving your pet.

8. Previous State Tax Liability. Did you pay previous state tax liabilities in 2012? The amount paid can be added to the state income taxes withheld from your paycheck for an even larger tax deduction.

Lisa Greene-Lewis, Lead CPA, American Tax & Financial Center at TurboTax, has more than 15 years of experience in tax preparation, including positions as a public auditor, controller, and operations manager. For up-to-date tax tips and tax news, go to the TurboTax Blog, where you can find answers to the most commonly asked tax questions.

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11 Changes You Must Know Before Filing Your Tax Return for 2012

With so many changes looming for 2013, it's easy to forget that there were some significant tweaks to the Tax Code for 2012. Here's a list of eleven changes to keep in mind before you file your 2012 tax return, due April 15, 2013:

1. Payroll tax credit will still affect self-employed taxpayers. The expiration of the payroll tax credit for 2013 was big news - but don’t forget that the credit was still in place for 2012. While that means nothing for employees subject to withholding (no additional breaks on your federal income tax return since you’ve already received the benefit of the payroll tax credit in your withholding), if you were self-employed you will receive an adjustment on your self-employment (SE) taxes when you file your federal income tax return. Your SE tax will be reduced by 2%; the SE tax rate of 12.4% is reduced to 10.4%.

[More from Forbes: 10 Ways To Become A Victim Of Tax Identity Theft]

2. Forms W-2 have more information this year. Under the Affordable Health Care Act, most employers are required to report the value of health care benefits received by an employee on a 2012 federal form W-2 (a few small businesses are still exempt from reporting under the transitional relief offered by IRS). The amount will be reported in box 12 with Code DD and should include both the portion paid by the employer as well as any amount paid in by an employee. Even though it appears on a W-2, this amount remains federal income tax free for 2012.

3. Roth Conversions May Be Taxable. Taxpayers who converted or rolled over amounts to a Roth IRA in 2010 and did not elect to include the entire amount in income in 2010 may need to report half of that taxable income on their 2012 returns. Favorable tax treatment made conversions in 2010 more appealing than normal: specifically, taxpayers had a three year window to pay the taxes due. That window expires with tax year 2012.

4. Relief For Underwater Taxpayers. With record numbers of taxpayers in foreclosure, Congress enacted the Mortgage Forgiveness and Debt Relief Act of 2007 to provide limited tax relief for taxpayers facing financial difficulties. Under the Act, qualified homeowners who were forced into foreclosure or mortgage restructuring on a principal residence could exclude income of up to $2 million ($1 million for married taxpayers filing separately) on the mortgage forgiveness (the difference between the lower amount received and the higher amount owed to the mortgage company). The fiscal cliff tax deal extended that tax relief through 2013 making it possible for taxpayers to avoid a huge tax bill on 2012 short sales.

[More from Forbes: 15 Ways To Invite An IRS Audit]

5. Increased Standard Deduction.The amount of the standard deduction increased for all taxpayers in 2012. The rates for 2012 were:

Single: $5,950, up $150 from 2011Married Filing Separately: $5,950, up $150 from 2011Head of Household: $8,700, up $200 from 2011Married Taxpayers Filing Jointly and Qualifying Widow(er): $11,900, up $300 from 2011

This is good news for most taxpayers since two out of every three taxpayers will claim the standard deduction in 2012.

6. Increased Personal Exemption. Similarly, the value of the personal exemptions for 2012 also increased. While exemptions were worth $3,700 in 2011, they rose to $3,800 for 2012.

7Sales Tax Deduction Still An Option. Taxpayers who itemize may deduct state income taxes paid on their federal return putting those taxpayers who live in a state without an income tax arguably at a disadvantage. A federal law which allowed taxpayers the option of choosing to deduct state income taxes paid or sales taxes paid offered temporary relief for those folks - and those who made high dollar purchases but lived in low tax states. That tax break - which debuted in 2005 - expired at the end of 2011. However, the tax deal extended that option through 2013, making it still a viable option for taxpayers in 2012.

8Tax Breaks for Charitable Donations from IRAs Extended. The new tax deal extended the qualified charitable distribution provisions which were set to expire through 2012 and 2013. Generally, distributions from an IRA are taxable when withdrawn whether payable to an individual or a charity. However, under the special rules, a withdrawal from an IRA (other than an ongoing SIMPLE or SEP) owned by an individual who is age 70½ or over that is paid directly to a qualified charity can be excluded from gross income. Up to $100,000 of distributions be distributed - and that amount can be used to satisfy a taxpayer’s required minimum distributions (RMDs) for the year. Even better? Special rules allow taxpayers to treat donations made before February 1, 2013, as qualifying distributions for 2012.

9. Education Tax Breaks Strengthened. The American Opportunity Credit (the super-charged version of the Hope Credit) was extended through 2012 for expenses paid for tuition, certain fees and course materials for higher education. The maximum credit available is $2,500 in 2012 which includes 100% of qualifying tuition and related expenses not in excess of $2,000, plus 25% of those expenses that do not exceed $4,000. Additionally, the Lifetime Learning Credit sticks around for 2012, capped at $2,000, which applies to 20% of the first $10,000 of qualifying out-of-pocket expenses (but no double-dipping: you can't claim both credits in the same tax year for the same student). Also getting a boost? The above-the-line Tuition and Fees Deduction was extended so that taxpayers who don't itemize can continue to benefit.

[More from Forbes: Taxes From A To Z]

10. Alternative Minimum Tax (AMT) Relief. The tax deal passed in January 2013 provided significant AMT relief for middle class taxpayers in 2012 - and beyond. The AMT exemption for 2012 was increased to $50,600 for single taxpayers (an increase of nearly $20,000) and $78,750 for married taxpayers filing jointly (an increase of more than $30,000). Even better? Beginning with 2012, AMT relief will be adjusted for inflation each year - no more patches!

11. Adoption Credit Survives - But Is Limited. Under the new tax deal, the adoption credit was saved. Originally, the adoption credit was scheduled to sunset at the end of 2010 but was temporarily extended as part of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010; it was also made refundable (a nonrefundable credit can reduce the amount of tax you owe to zero while a refundable credit can reduce your tax liability to zero and any remaining credit will be refunded to you). The new tax deal did extend the adoption credit permanently with one significant hit: the credit is no longer refundable. The credit was only refundable in 2010 and 2011. Taxpayers in 2012 can claim the adoption credit but it is not refundable.

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4 Keys to a Successful Retirement

All of us hope that at the end of a long career we will be able to enjoy retirement secure in the knowledge that we can support our desired lifestyle without ever running out of money. Given that Americans are living longer than ever before, however, the risk of outliving our money in retirement is real. Diligence, careful planning and realistic expectations are therefore essential to achieving a successful life once our working life is done.

Here are some key areas to focus on as you plan ahead for your retirement.

1. Save Enough

In order to realize our desired retirement lifestyle without fear of outliving our money, we need to accumulate enough savings. But how much is enough? That depends on the annual cost of our desired lifestyle. For many, maintaining their current lifestyle in retirement is the goal, so knowing what it currently costs to support that lifestyle is important.

Once we have determined a target annual income in retirement, we can calculate how much of a nest egg will be required to support that income.

One way to calculate the size of the required nest egg is to back into it using a common rule of thumb known as the “4% Rule.” This rule is typically used to determine a “safe withdrawal rate” in retirement but is also useful in determining the required savings amount to support a target retirement income stream.

The 4% rule states that a retiree aged 60-65 can safely withdraw 4% a year from a reasonably diversified portfolio divided equally between stocks and bonds (adjusting that rate by annual inflation) and not run out of money for at least 30 years.

Using this rule of thumb, one would need to accumulate $1.5 million by the start of retirement in order to safely withdraw an inflation-adjusted $60,000 per year for 30 years. This is certainly not an insignificant sum. Supporting an inflation-adjusted income of $100,000 per year requires an accumulation of $2.5 million, an even more imposing amount. (Note that the 4% rule has been refined over the years and is also being called into question by some in light of the current low yield environment for bonds.)

While Social Security can provide additional income to supplement a portfolio in retirement, it is clear that saving as much as we can during our working lives is key to being able to afford a quality retirement. Taking advantage of workplace retirement savings plans, such as a 401K, and supplementing that by additional tax-deferred and taxable savings is essential. Target saving at least 10% of your gross annual income throughout your working life and remember that the key to accumulating wealth is to save as much as you can for as long as you can in order to allow the power of compounding to work for you.

2. Tax Diversify Your Savings

The effect of income taxes on our retirement should not be forgotten. Taxes are another “cost” impacting retirement cash flow. It is therefore important to minimize this impact as much as possible through good tax planning.

One way to achieve tax efficiency in retirement is to diversify pre-retirement savings across taxable, tax deferred and tax-free accounts. This practice of “tax diversification” will allow one to fine-tune portfolio withdrawals in retirement, depending on their relative tax impact, and carefully choose which “buckets” to tap for ongoing income needs.

Tapping taxable accounts first often makes the most sense given that this strategy typically enables a retiree to pay less income and capital gains tax while allowing savings to continue to grow in tax-deferred IRA and Roth accounts.

Ongoing tax planning is crucial for single retirees, given how quickly income tax rates rise for single people, as well as for married couples since it is inevitable that one spouse will predecease the other at some point in the future.

3. Use Effective Social Security Taking Strategies

The future of Social Security is often called into question raising concern regarding whether this program will be available to supplement our portfolio income in retirement.

It is true that current projections show Social Security benefit payouts starting to exceed program revenues beginning in 2016. However, even if no reforms are implemented, it is expected that Social Security will continue to be able to pay out 100% of benefits until 2033, and approximately 75% of benefits thereafter.

Social Security is therefore likely to remain a resource in retirement and maximizing this benefit is important. The fact that Social Security benefits are indexed for inflation throughout the benefit period and continue to be paid to surviving spouses make this program unique and an important supplement to an investment portfolio.

A discussion of the array of Social Security taking strategies is beyond the scope of this article. It is important to note, however, that there is a penalty of approximately 8% for each year benefits are taken before full retirement age. This reduction is permanent and also impacts surviving spouse benefits.

Deferring Social Security at least until full retirement age (age 66 for those born during 1943-1954) can result in significant additional retirement income. Waiting until the maximum deferral age of 70 will increase benefits by an additional 8% each year, to a maximum of 132% of the full retirement age benefit for most baby boomers. This strategy is recommended for the higher earning spouse in a married couple.

4. Have Realistic Expectations

Perhaps the biggest key to retirement success is to have a realistic expectation of the lifestyle we can afford. If savings and other sources of retirement income fall short of our goal as we near target retirement age, we need to assess our options. These essentially come down to living a more modest retirement lifestyle, working longer, or some combination of the two. Rarely is it prudent to swing for the fences by increasing the risk of our investments in an effort to overcome a savings shortfall. This strategy can backfire, leaving you in a deeper hole with no time to recover.

Retirement planning is fraught with complexity. There are no guarantees that we will achieve our goal and lots of risk of falling short given the vagaries of the stock market and the uncertainty around Social Security. The above discussion did not even touch on healthcare costs and the cloudy future of Medicare.

It can be daunting to try to navigate the retirement planning maze on one’s own. Consider working with a fee-only financial adviser to be your guide along the way and increase the chance that you will achieve your retirement goals, whatever those may be.

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Thursday, July 18, 2013

$917M in unclaimed tax refunds to expire April 15

WASHINGTON (AP) -- If you didn't bother filing a federal tax return for 2009, it might be a good time to rethink your tax strategy.

The Internal Revenue Service says it has $917 million in unclaimed tax refunds from 2009, and time is running out to claim them.

The refunds are owed to nearly 1 million people who failed to file returns for 2009. Taxpayers must file their 2009 returns by April 15 to claim their refunds. If taxpayers don't file returns, the law says they have a three-year window to claim refunds. After that, the money becomes property of the U.S. Treasury.

The IRS says there is no penalty for filing a late return that qualifies for a refund. But the agency says refunds may be delayed if taxpayers also failed to file returns for 2010 and 2011.

The government can also withhold tax refunds to settle unpaid federal and state taxes, as well as unpaid child support and past due student loans.

People in every state and the District of Columbia are owed refunds, including 100,700 people in California and 86,000 people in Texas, the IRS said. Most of the refunds exceed $500.

Some people may not have filed tax returns because they made too little money and weren't required to file, the IRS said. However, if they had federal income taxes withheld from their pay, those people may be entitled to refunds.

Also, many low- and middle-income people who didn't file returns may be missing out on the Earned Income Tax Credit. In 2009, a married couple with three or more children could earn up to $48,279 and qualify for the credit. Income thresholds are lower for couples and single filers with fewer children.



Unclaimed refunds by state:


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Avoid the Most Common Tax Mistakes to Get a Faster Refund

As the United States tax code clocks in at 18,500, pages, it's easy to see how taxpayers can make a mistake or two when filing federal income tax forms. And with over 97,000 full-time employees, you can bet it's not going to go unnoticed.

Here are some of the guiltiest repeat offenders -- steer clear of them and you'll get your refund faster and can avoid having your IRS agent over for a cup of tea.

1. Sign on the dotted line.

Probably the easiest part of preparing your taxes is signing your John Hancock, but it's still one of the most common mistakes year after year. The IRS will not accept your return if you fail to sign and date your income tax form. It delays the process and your refund. Remember also that when filing jointly, both spouses must sign.

2. Check the right box.

Another common mistake is checking the wrong filing status. You have five choices: Single, married filing jointly, married filing separately, head of household and qualifying widower. Taxpayers often incorrectly claim head of household filing status without meeting the requirements. You can qualify for head of household status (and a larger deduction) if you are unmarried at the end of the year, have cared for a closely-related dependent for over half the year and paid more than half the cost of maintaining a home for yourself and your dependent.

3. Be a diligent scribe.

This is another mistake that you can sidestep if you're just a little more careful. The names and Social Security numbers for the taxpayer, the taxpayer's spouse, dependents and children who qualify for the Earned Income Credit or Child Tax Credit must be included on the return exactly as they appear on their Social Security cards.

4. Show them the money.

According to the IRS, taxpayers often make the mistake of failing to report income that's not included on a W-2 or 1099 form, including rental income and self-employment income. If you neglect to report that type of income, it may cost you in the long run: The IRS can assess interest and penalties, not to mention criminal prosecution. Don't risk it.

5. Get the numbers right.

One of the top reasons the IRS adjusts returns is math mistakes, so get out that calculator and start number crunching. It also doesn't hurt to have a second set of eyes check your work. This is another advantage to filing online -- the electronic filing software double-checks your math.

An error-free return means faster processing and a faster refund check for you, so cross your T's and dot your I's and before you put it in the mail, make a copy.

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A Look at the Craziest Tax Write-Offs

It's hard to think there's anything funny about taxes when you're under a mountain of paperwork, but CBS News contributor and analyst Mellody Hobson has a little comic relief for taxpayers. In all her research about taxes, she came across some fairly ridiculous write offs the IRS has allowed -- and some crazy things people have tried and failed to slip by the IRS.

First, you'd be amazed about what people try to write off concerning their pets, and it's no wonder why -- they're expensive. According to the ASPCA, dogs and cats both cost over $1,000 a year. There was the case of the woman who claimed an unusually high amount of medical expenses for a dependent, but she didn't have a spouse or any children. Turns out the "dependent" was her dog. Her accountant set her straight that if it's covered in fur, you can't claim it as a dependent. In general, pet expenses are not deductable, but there are a couple surprising exceptions.

For instance, you can deduct expenses related to a foster animal if the goods or services are solely for the foster pet and if the organization is a registered non-profit. That means it has 501(c)(3) tax status. Also, expenses exceeding $250 may require a letter from the organization. In a landmark tax court case, a California woman was able to deduct 90 percent of the $12,000 in deductions she claimed for the 70 cats she fostered. Seventy cats. But this wasn't your average crazy cat lady -- she was working with a legitimate charity.

Another case in which you can deduct dog expenses? If you own your own business and your dog doubles as a security system. But don't push it: You can't deduct expenses for your Chihuahua. If you're going to claim you employ Fido as a guard dog, you need to be a little bit afraid of him yourself -- we're talking pit bulls and German Shepherds, not a Labrador who greets you at the door with a squeaky toy. You can't deduct the cost of the dog itself, but related expenses -- like food and medical bills -- can qualify. The craziest detail? You can depreciate your guard dog over its lifespan as determined by a local breeder. Remember, as with everything tax-related, documentation and receipts are crucial.

Some people want to get paid for love, and sometimes they actually can. You know that loaf of a boyfriend or girlfriend? They could add value come tax time. To claim a nonrelative as a dependent, he or she had to live in your home for the full tax year and make less than $3,800 in gross income for 2012. You also generally must provide more than half of the person's financial support, and he or she can't be claimed as a dependent by anyone else.

There have been a couple of completely ridiculous claims in this arena, like the man who tried to deduct money spent on his mistress as a business expense. There is another story about a man whose accountant asked him and his wife about the mortgage interest deduction on their condo in Utah. The deduction was legitimate but his wife didn't know about the condo, where he'd set up his mistress. It may have been the last time they filed a joint return.

We recently tied up awards season with the Academy Awards, and one thing most movie stars have in common is that they aren't hard to look at. A lot of aspiring actors and actresses are tempted to write off plastic surgery, but just because you incur an expense for business reasons doesn't mean it qualifies as a deduction.

Cosmetic surgery is generally not deductible because it's for aesthetic reasons. To qualify as a medical deduction, the procedure must be medically necessary, meaning it was prescribed by a physician. So a nose job could qualify if you are repairing a deviated septum. Remember, all your medical expenses, including any allowable plastic surgeries, must come to more than 7.5 percent of your adjusted gross income before you can claim them.

To qualify as a business expense, you have to prove the surgery is related to your job performance, and there is one infamous case of plastic surgery satisfying this requirement. An exotic dancer with the stage name "Chesty Love" had her breasts augmented to a 56FF and then a 56N. After the IRS ruled that her surgeries were personal expenses, she appealed, citing her surge in income post surgery.

Four years after she filed, a judge eventually ruled that the implants could be deducted, comparing them to work clothes and uniforms, which are allowable only if they satisfy a two-step test:

1 - Required as a condition of employment

2 - Unsuitable for everyday use

Considering Chesty Love's new assets weighed in at ten pounds apiece and she would have taken them "off" after work if possible, they were considered "props" that could, in fact, be deducted.

One final crazy write-off: A young Amish man deducted his buggy. At first blush, this seems to be a completely legitimate write-off -- it's for business purposes. But the accountant looked closer and saw that the buggy had been outfitted with a velvet interior, kick plates, dash lights, speedometer, hydraulic brakes and dimmer switches. This Amish boy had completely pimped his buggy, spending over $3,500 instead of the average of about $2,700. The accountant ended up allowing him to deduct a portion of the buggy, minus the tinted windows.

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Tax-Deferred Investing Matters More Than Ever

There's an anonymous quote that is very fitting given the new realities of our current tax environment, "I'm putting all my money in taxes -- it's the only sure thing to go up." Yes, taxes have gone up for many Americans, and it's my opinion that our politicians will continue with the eternal battle of taxes and spending for years to come.

As we consider taxes in the financial planning and investment world, we always look to minimizes taxes by trying to hold investments for long enough so they qualify for lower tax rates associated with long term capital gain treatment, or by trying to use capital losses to offset capital gains. In the end, there must be a balance in portfolio management - we always want to be aware of taxes, however, we don't want the "tax-tail" to wag the dog.

The further we look into investment returns, the more we realize that the most attractive account structure for long-term returns is to defer our taxes as long as possible and allow the investor to compound their gains over many years. Some of the most common choices for tax deferred accounts are available through retirement related vehicles offered through our employer. Oftentimes, the employer will match a portion of our deferred contribution, which only adds to the benefit - think of 401(k)s, 403(b)s, and 457(b)s. Even without the employer match there are similar arrangements offered to individuals, including IRAs, Roth IRAs, SEP plans and more. The big take-away is that contributing and investing within a tax deferred account structure is undoubtedly the first logical step that all savvy tax-aware investors should participate in.

We pay "taxes," but our government refers to them as "revenue." As such, the government puts limits our contributions in tax deferred retirement accounts. Take the 401(k) as an example. The annual elective deferral contribution is $17,500 for 2013. (You can contribute an additional "catch-up" deferral of $5,500 if you are 50 or older). Even with the contribution limits, every investor should maximize their contributions into tax deferred accounts. To illustrate the power of the tax deferral and compounding of investment growth, consider the following scenario.

Let's look at a 50 year old who contributes $39,500 per year into their tax deferred accounts ($23,000 in their 401(k) and $6,500 in their IRA) each year for 20 years and gets a 7 percent annual return. At the end of 20 years, the tax deferred value is 40 percent higher than the taxable value ($1.89 million tax deferred verses $1.35 million taxable). The tax deferred investment account allowed for significant compounding and growth over a long period of time and produced more than $539,000 in additional value!

Clearly, there are significant advantages to tax deferred investments and they should be strongly considered when planning and building an investment portfolio for the long term. Understanding the features, benefits and risks with each investment vehicle is essential to success. With the escalation of tax rates, taking full advantage of the tax deferral is a benefit every investor should exploit.

Dean J. Catino, CFP®, CPRC®, is a Managing Director and co-founder of Alexandria, VA-based Monument Wealth Management, a full service wealth management firm located in the Washington, DC area. Dean and the rest of the Monument Wealth Management team can be followed on their blog at "Off The Wall", on Twitter @MonumentWealth, and on their Facebook page.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Monument Advisory Group, LLC, a Registered Investment Advisor. Monument Advisory Group, LLC, and Monument Wealth Management are separate entities from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. When making retirement or tax-deferred investments, early withdrawals, retirement and death may cause penalties or taxes. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The hypothetical example listed above and is not representative of any specific situation. Actual results may vary.

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IRS High-Tech Tools Track Your Digital Footprints

The Internal Revenue Service is collecting a lot more than taxes this year--it's also acquiring a huge volume of personal information on taxpayers' digital activities, from eBay auctions to Facebook posts and, for the first time ever, credit card and e-payment transaction records, as it expands its search for tax cheats to places it's never gone before.

The IRS, under heavy pressure to help Washington out of its budget quagmire by chasing down an estimated $300 billion in revenue lost to evasions and errors each year, will start using "robo-audits" of tax forms and third-party data the IRS hopes will help close this so-called "tax gap." But the agency reveals little about how it will employ its vast, new network scanning powers.

Tax lawyers and watchdogs are concerned about the sweeping changes being implemented with little public discussion or clear guidelines, and Congressional staff sources say the IRS use of "big data" will be a key issue when the next IRS chief comes to the Senate for approval. Acting commissioner Steven T. Miller replaced Douglas Shulman last November.

[Read: Are You Taking the Right Tax Deductions?]

"It's well-known in the tax community, but not many people outside of it are aware of this big expansion of data and computer use," says Edward Zelinsky, a tax law expert and professor at Benjamin N. Cardozo School of Law and Yale Law School. "I am sure people will be concerned about the use of personal information on databases in government, and those concerns are well-taken. It's appropriate to watch it carefully. There should be safeguards." He adds that taxpayers should know that whatever people do and say electronically can and will be used against them in IRS enforcement.

IRS's big data tracking. Consumers are already familiar with Internet "cookies" that track their movements and send them targeted ads that follow them to different websites. The IRS has brought in private industry experts to employ similar digital tracking--but with the added advantage of access to Social Security numbers, health records, credit card transactions and many other privileged forms of information that marketers don't see.

"Private industry would be envious if they knew what our models are," boasted Dean Silverman, the agency's high-tech top gun who heads a group recruited from the private sector to update the IRS, in a comment reported in trade publications. The IRS did not respond to a request for an interview.

In trade presentations and public documents, the agency has said it will use a massively parallel computer system that can analyze data from different networks to find irregularities and suspicious activities.

Much of the work already has been automated to process and analyze electronic tax returns in current "robo-audits" that flag unusual behavior patterns. With IRS audit staff reduced by budget cuts this year, the agency will be forced to rely on computer-generated audits more than ever.

The agency declined to comment on how it will use its new technology. But agency officials have been outlining plans at industry conferences, working with IBM, EMC and other private-sector specialists. In presentations, officials have said they may use the big data for:

-- Charting and analyzing social media such as Facebook

-- Targeting audits by matching tax filings to social media or electronic payments

-- Tracking individual Internet addresses and emailing patterns

-- Sorting data in 32,000 categories of metadata and 1 million unique "attributes"

-- Machine learning across "neural" networks

-- Statistical and agent-based modeling

-- Relationship analysis based on Social Security numbers and other personal identifiers

Officials have said much of the data will be used only for research. The agency's economic forecasts and data are a key part of Washington's budget infrastructure. Former commissioner Douglas Shulman said in an IRS statement that the technology will employ "billions of pieces of data" to target enforcement and to "detect and combat noncompliance."

[Read: The Big Tax Shelter Many Financial Planners Overlook.]

U.S. Tax Court records show that information gathered from Facebook and eBay postings have been used by the IRS in defending tax challenges. Under a Freedom of Information Act disclosure obtained by privacy advocates at the Electronic Frontier Foundation, the group published the IRS's 38-page manual used to train auditors to search Internet addresses, Facebook postings and other social media to back audit enforcements.

In practice, the third-party data has been used only if the irregular returns merit more attention. In one much-cited example, IRS officials talk about prisoners who were filing false claims for energy tax credits for window replacements.

The agency, wary of public opinion about invasive audit practices, has pulled back from using so-called "social audits," which, for example, might single out horse-racing enthusiasts or sailboaters for special attention. But by screening existing data for one million unique attributes, the agency can quietly create a DNA-like code to understand the economic behavior of any individual.

The IRS last year used a profiling test model to study 1,500 tax preparers with histories of reporting deficiencies and managed to recover $200 million. It cited the experience as proof that its data analysis works. Early this year, however, a new set of rules it developed for tax preparers was thrown out by a federal court who said the agency had overstepped its mandate. The IRS would not comment on whether the rules were based on its new screening tools.

Lots of computing power, for what? The agency's computers can now load all U.S. tax returns in just 10 hours, compared with the four months it took just eight years ago, Jeff Butler, IRS director of research databases told the IBM TechAmerica conference last November. That leaves a lot of time for other uses. The IRS says it expects 80 percent of its tax returns to be filed electronically this year. That makes a total of 250 million returns filed, with $2 trillion in revenue.

But processing those returns uses only a fraction of the agency's computing power. An entire year of tax returns amounts to 15 terabytes, or just 1.5 percent of the IRS storage of 1.2 petabytes (one quadrillion bits of information), based on public data from IRS presentations. The agency has expanded its data capacity by 1,000 percent in the past six years.

It also recently assembled $350 million in high-tech tools to do a lot of auditing, tracking and analyzing what people do on the Internet. The agency has used social media and other third-party sources in the past, but it has now increased its capability to so from its own growing database of networks.

Congressional staffers on the House Ways and Means Committee and the Joint Committee on Taxation, both of which oversee the IRS, say they have been occupied by more pressing issues related to the budget crisis, and Congress gave the tax officials leeway to use technology to solve the growing problem of identity theft. But they said they will look at the possibility of errors in robo-audits as well as the storage of data on millions of taxpayers.

The IRS is guarded about how its audits are triggered, tax experts say, because too much information on what they do might help tax cheats. Major accounting firms have been given little information on the changes and were reluctant to comment, although some said privately that they are aware of the new IRS tools but it is too early to tell how they will be used. Taxpayer advocacy groups also say they are waiting to see how the IRS manages its technology upgrade, and are holding out hope that it will make taxes more fair and efficient and force tax evaders to pay their share of the overall burden.

[See Tax Tips: The Good, Bad and Ugly (But Legal)]

While many applaud the effort to update government technology with private-sector tools, they say the agency needs to conform to higher standards.

"I don't really see strong legal regulation in place to manage something of this magnitude," says Paul Schwartz, University of California law professor and co-director of the Berkeley Center for Law & Technology. The IRS is working with the same kind of oversight and rules that were developed in the paper tax-return era, says Schwartz. But with the technology it now has, the agency can "see into people's lives" as never before.

Tax returns are like narratives of how people spent their money, and tax audits have been guided by "reasonable" interpretations of allowable credits and deductions by the IRS agents who manage audits. "Social media can make people testify against themselves," Schwartz says. "They provide a counter-narrative." He cites as an example a businessperson going to Florida for five meetings over a week who also visits family in Miami. A casual Google+ posting to friends online about "visiting my mother in Florida" could paint a different picture than the deduction taken on the tax form.

"It will be interesting to see what the IRS does with all of their new tools. They will have to be very careful," says Schwartz. So, too, will taxpayers.

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American Cities with the Highest (and Lowest) Taxes

Tax season is here and, according to a recent report, American families in the nation's largest cities will be shelling out 15% or more of their income, and that doesn't even include federal taxes.

The report, released by the Office of Revenue Analysis of the Government of Washington, D.C., reviewed the estimated property, sales, auto and income taxes a family paid in 2011 in the largest city in each state. The differences were stark. A family of three earning $75,000 in Cheyenne, Wy., paid just $2,808, or 3.7% of its income. In Bridgeport, Conn., that same family would have paid $16,105, or 21.5% of its income. Again, this is excluding federal taxes.

One of the biggest factors in how much a family can expect to pay is the state and local tax rates affecting their city. In Bridgeport, Conn., the effective property tax rate, or how much people pay per $100 of property, is among the highest of the large cities reviewed, and property values are higher, meaning a family earning $100,000 per year can expect to spend $11,299 in property taxes alone.

According to Edward Wyatt, fiscal analyst for the Office of Revenue Analysis, while tax rates are certainly a factor in the tax burden on families, it is more the existence of certain kinds of taxes that determines whether families pay through the nose or barely at all come mid-April.

Personal income tax is one of the key factors. Seven states have no income tax, and six of the 10 cities with the lowest tax burdens are in these states. Two more cities in the bottom 10 — Memphis, N.H., and Manchester, Tenn. — only tax nonwage income, such as dividends and interest. None of the cities with high tax burdens are in income tax-exempt states.

The cities with the highest tax burdens tend to be much larger ones, like New York, Philadelphia and Los Angeles, while the low tax burden cities are smaller and in more rural areas, including Fargo, Anchorage and Cheyenne. Wyatt suggested this may have to do with the cost of running these larger cities, as they have to spend less per capita on programs like social services.

Another interesting trend was that cities with higher tax burdens tended to have higher unemployment, while lower-taxed cities tended to have among the lowest unemployment. While this is often a product of the state economy, in some cases, the city's rate is much higher than the state. Bridgeport, the city with the highest tax burden among the 51 cities studied, also had the highest unemployment rate, at 11.7% in December. The state of Connecticut's rate that month was just 8.6%.

[More from 24/7 Wall St.: The States With The Strongest And Weakest Unions]

Based on the local government report: Tax Rates and Tax Burdens in the District of Columbia — A Nationwide Comparison, 24/7 Wall St. reviewed the cities where a family of three in different income brackets would spend the largest and smallest percentages of their income on state and local taxes. In order to reflect the respective rank in all income levels measured by the report, we considered all of them for the purposes of the ranking. As a result, the cities with highest taxes on our list had the highest combined scores and the cities with the lowest taxes had the lowest scores. The report covers the largest city in each state, as well as Washington, D.C. All estimates are for the 2011 fiscal year. 24/7 Wall St. also reviewed data for these cities from the U.S. Census Bureau, including the occupational breakdown of the city's workforce, and income, poverty and home value data, all for 2011. From the Bureau of Labor Statistics, we reviewed the unemployment rates for these cities as of December 2012.

Cities with the Lowest Tax Burdens

10. Las Vegas, Nev.

Taxes for family earning $25,000: $3,027 (24th highest)
Taxes for family earning $150,000: $6,305 (3rd lowest)
Unemployment rate: 10.2% (9th highest)

Las Vegas had no state or local income tax in 2011, which saved a hypothetical family of three earning $25,000 a year $266 over the average city, and a family earning $150,000 per year an estimated $6,835. Also, the city's effective residential property tax rate was just $1.15 per $100 of assessed value, a rate lower than most of the cities reviewed. Although the city had an especially high 7.75% sales tax, it also had one of the nation's lowest sales tax burdens. Among the reasons why, in Nevada only 37.4% of goods are taxed at sale, and food and other consumer goods are exempted. Currently state and local sales tax payments are also tax deductible in Nevada.

9. Manchester, N.H.

Taxes for family earning $25,000: $2,357 (4th lowest)
Taxes for family earning $150,000: $6,582 (7th lowest)
Unemployment rate: 6.0% (16th lowest)

Manchester was one of just five cities reviewed with no state or local sales tax. Additionally, neither the city nor state had an income tax on personal wages, with state income taxes limited to sources such as interest and dividend payments, inheritance and business profits. However, the city is heavily dependent on property taxes, which its website describes as "the principal tax of the City." In 2011, for a hypothetical family of three, Manchester's property tax burden was among the highest for all cities observed at all levels of income. Property taxes also comprised the majority of any family's state and local tax burden: A Manchester family earning $75,000 would have paid $5,134 in state and local taxes in 2011. Of this, $4,645 would have been property taxes.

8. Sioux Falls, S.D.

Taxes for family earning $25,000: $2,565 (7th lowest)
Taxes for family earning $150,000: $7,127 (8th lowest)
Unemployment rate: 4.2% (4th lowest)

Sioux Falls residents benefit from lower than average taxes. Helping to significantly alleviate the total tax burden, Sioux Falls is one of just a few cities where residents are not required to pay any income taxes. In addition, auto taxes are among the lowest of all cities. The one downside for taxpayers is the sales tax burden, which is among the top third of all cities measured. The unemployment rate of 4.2% as of December 2012 was the fourth lowest of all cities measures. The surplus in the city's 2013 budget is expected to be about $1.7 million.

[More from 24/7 Wall St.: The Seven States With The Highest Gas Prices]

7. Memphis, Tenn.

Taxes for family earning $25,000: $2,941 (23rd lowest)
Taxes for family earning $150,000: $6,450 (5th lowest)
Unemployment rate: 9.8% (11th highest)

Memphis charged no city-level personal income tax in 2011. Neither did the state of Tennessee, where only income from dividends or interest payments, as well as corporate income, are taxed. However, residents did pay a total of 9.25 cents per dollar in sales taxes, higher than all but three other cities. All of these cities have higher incomes than Memphis, where more than 27% of the population lives below the poverty level, compared with 15.9% nationwide. Partly because of sales taxes, a hypothetical family earning $25,000 paid 11.8% of its income in state and local taxes, while a family earning $150,000 paid just 4.3%.

6. Billings, Mont.

Taxes for family earning $25,000: $2,223 (the lowest)
Taxes for family earning $150,000: $11,036 (14th lowest)
Unemployment rate: 4.1% (3rd lowest)

In 2011, residents of Billings did not have to pay any sales tax, either to the city or their state. Sales taxes cost a family of three earning $25,000 a year $728 and a family earning $150,000 a year $2,194. Additionally, Montana is a low income tax state. At all income levels, Billings had a lower income tax burden than all observed cities where such a tax was in effect. However, not all taxes in Billings were low; gas taxes were more than four cents per gallon higher than the nationwide average in 2011. The state also provides oil and gas companies with a controversial tax holiday, which allows production at new wells to be taxed at a rate of less than 1% during their first 12 to 18 months of operations.

5. Jacksonville, Fla.

Taxes for family earning $25,000: $2,956 (26th lowest)
Taxes for family earning $150,000: $6,429 (4th lowest)
Unemployment rate: 7.7% (21st highest)

As residents of Florida, individuals and families living in Jacksonville pay neither a state nor local income tax. Partly because of this, the tax burden for wealthier families remained low in 2011. A typical family of three with two sources of income, earning $150,000 per year, would have paid 4.3% of its income on state and local taxes — less than all but four other cities. However, a family earning just $25,000 per year would have had to pay 11.8% of its annual income in taxes. Florida's 6% sales tax accounts for the majority of the state's tax revenue.

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