• You can choose each tax year to take the amount of a qualified tax paid or accrued during the year as a foreign tax credit or as an itemized deduction.
• The foreign tax credit is intended to relieve U.S. taxpayers of the double tax burden when their foreign source income is taxed by both the United States and the foreign country from which the income is derived.
• Only income taxes paid or accrued to a foreign country or a U.S. possession qualify for the foreign tax credit.
• You can choose to take the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction.
• To choose the foreign tax credit you must generally complete Form 1116 (PDF), Foreign Tax Credit, and attach it to your Form 1040 (PDF).
• You may claim credit without attaching Form 1116 if all of your foreign source income is interest or dividends reported to you on qualified payee statements, the total amount of qualifying foreign taxes you paid or accrued is not more than $300 ($600 in the case of a joint return) and is also paid to countries recognized by the United States.
• To choose the deduction, you must itemize deductions on Form 1040, Schedule A (PDF).
• There are numerous items that can be claimed only as a deduction.
• You may not take either a credit or a deduction for taxes paid or accrued on income you exclude under the foreign earned income exclusion or the foreign housing exclusion. There is no double taxation in this situation because the income is not subject to U.S. tax.

@IRSTax

Generally, realized capital losses are first offset against realized capital gains.  Any excess losses can be deducted against ordinary income up to $3,000 ($1,500 if married filing separately) on line 13 of Form 1040.

Losses in excess of this limit can be carried forward to later years to reduce capital gains or ordinary income until the balance of these losses is used up.

Capital gains and losses on the sale or trade of investments are classified as either short-term – if the property has been held for one year or less – or long-term on Schedule D of Form 1040.  Though these two categories of capital gains and losses are subject to different rates in the event of a net gain, a net capital loss resulting from either category is directly deductible from ordinary income up to the annual limit.

This provision of law often works to the taxpayer’s advantage, yielding greater relief for losses than if an applicable long-term capital gains tax rate were used.  Generally, capital gains rates are lower than the rates on ordinary income.

For example, if a taxpayer in the 27-percent bracket had a net long-term capital gain on stocks of $2,000, the tax due from the gain would be calculated at the 20-percent capital gains rate for a total of $400.

But if the same taxpayer has a net long-term capital loss of $2,000, the corresponding tax savings would be calculated at the individual’s ordinary rate of 27 percent, for a $540 reduction in taxes.

A “paper loss” – a drop in an investment’s value below its purchase price – does not qualify for this deduction.  The loss must be realized through the asset’s sale or exchange.

Taxpayers seeking more information on how to reduce their tax bill through by deducting stock and investment losses on their tax returns can get help from IRS Publication 544, Sales and Other Dispositions of Assets; Publication 564, Mutual Fund Distributions; and Publication 550, Investment Income and Expenses (Including Capital Gains and Losses).

@IRSTax

Here, according to the IRS, are the 10 most common taxpayer mistakes:

Claiming the wrong filing status

Sorry, you can’t just choose to file single or married. Your marital status is determined as of Dec. 31. Anything before that date really doesn’t matter for tax purposes. You file either jointly or married filing separately. You may qualify for “head of household,” but you have to satisfy all the requirements. You don’t qualify just because you consider yourself the head of your household.Claiming the wrong status could kill your eligibility for the child tax credit, the earned-income credit and exemptions for dependents. Check out the instructions for Form 1040 for detailed information to help you select your correct filing status.

Omitting or using wrong Social Security numbers

The Social Security numbers you list for your dependents, the earned-income credit and the child tax credit must match your dependents’ Social Security cards. Otherwise, the IRS computers will reject your credits and deductions.If you’re still doing your return by hand, put down that stone tablet you’re reading and pay attention. Make sure your handwriting is legible, at least on your tax return. Although to be fair, I suspect that many of these mistakes attributed to taxpayer error actually result from bad inputting by the IRS.

Failing to use correct forms and schedules

Think of the IRS as a vast bureaucracy that responds to the dictates of an outdated computer system for audit direction. You don’t want to anger the computer gods.

If you file your employee business expenses on Schedule A without attaching Form 2106, the computer’s going to click. The more the computer clicks, the more likely that you will get audited.So, be nice to the computer. Correctly file all of the appropriate forms.

Failing to sign and date the return

This one is easy. If you don’t sign the return, you haven’t filed. Both spouses must sign a joint return. If you haven’t filed, you’re going to be subject to all kinds of penalties, not to mention interest on any amounts not paid in full.The only reason not to sign the return is if the numbers on it would constitute perjury. Do you think the IRS wouldn’t notice?

Claiming ineligible dependents

When the IRS started requiring Social Security numbers for claimed dependents, millions of dependents disappeared. I suspect most of them sulked back to their doghouses, flew to their bird cages or jumped back into their aquariums.In any case, the qualification criteria to claim a dependent are technical and very specific. With nontraditional families, there are the exceptions, the exclusions to the exceptions, the exceptions when the exclusions don’t apply and the special rules for the third Wednesday each month.

You’ll have to meet each of at least four qualifications. Follow the flowchart in the instructions for your Form 1040. But it’s not simple.

Misusing — or not using — the earned-income credit

This one I blame on Congress. It’s a provision to help the poorest in our nation, but lawmakers designed it to be one of the most convoluted provisions in our tax code.It’s so bad that the IRS reports failure to claim the earned-income credit as its No. 6 top taxpayer mistake and incorrectly claiming the credit as No. 7.

Lots of crooks — and unwitting but misinformed taxpayers — illegally claim the credit. Many of those whom the credit was designed to aid lack the tax sophistication or the dollars necessary to hire a professional to claim those dollars.

Losing receipts

Receipts can mean deductions and tax savings. So, hunt down all those charitable organizations to which you contributed and make them give you a receipt for the donation. If you made more than one donation, get a receipt for each one. The receipt needs the date, the amount, the name of the charity. No receipt means no deduction.We’re not done yet. Start hunting down receipts for medical expenses. Perhaps you spent enough on health care that your expenses exceed the 7.5% income threshold. The total expenses that exceed 7.5% of your adjusted gross income are deductible. And don’t forget: These can include health insurance premiums.

And don’t forget the paperwork to prove property tax and mortgage deductions.

Failing to report domestic workers

Even if you don’t want to be a Supreme Court justice or the U.S. attorney general, you still have to pay the payroll taxes on your nanny, housecleaner or in-home caregiver.Sorry, it’s the law. If you pay $1,500 or more in 2007 (or $1,600 in 2008) to any one household employee, you’re going to have to withhold, and match, both Social Security (6.2%) and Medicare (1.45%) taxes. You must file Schedule H to compute and report the liability.

You’ll owe federal unemployment taxes if you pay wages of $1,000 or more in any calendar quarter to household employees. You may also owe state employment and disability taxes.

If you pay certain related parties, or employees under age 18 who qualify, you may escape liability. See Publication 926 for details.

Failing to report all income

You can’t avoid reporting all of your income just because you don’t get a W-2 form or a 1099. Not all income is reported on 1099s. That doesn’t excuse you from having to pay tax on it. The fact that there’s no reporting to the IRS doesn’t prevent the agency from auditing your receipts and reconciling your bank deposits with your reported income.Unreported income can lead to civil and criminal sanctions. I don’t care how lucky you feel. The potential consequences aren’t worth the risk.

Failing to check for the alternative minimum tax

The AMT, or “awfully mean tax,” was created to catch high-income taxpayers who used allowable deductions and credits to wipe out too much tax liability. It’s an alternative computation of your tax, with different deductions, add-backs and flat rates.You pay the higher of your regular tax or that computed under the AMT.

Unfortunately, because it hasn’t been updated to reflect inflation since the original bill was passed, the AMT has been projected to hit about 19 million families in 2007, including 64% of households earning $100,000 to $200,000.

You might not think you’re a victim, at least until you get that letter from the IRS with penalties and interest. The IRS has an AMT estimation calculator on its Web site, but, to be sure, run through Form 6251.

MSN Money

@IRSTax

1. AGI – Adjusted gross income, AGI, is all the income you receive over the course of the year such as wages, interest, dividends and capital gains minus things such as contributions to a qualified IRA, some business expenses, moving costs and alimony payments. The adjusted gross income is the first step in calculating your final federal income tax bill.

2. Credits — Tax credits are much like credits you get from a store. After you calculate your tax bill, you can use the credit to reduce the amount of the check you must write to Uncle Sam. Tax credits are more valuable than deductions because they directly cut the amount of tax you owe, rather than reducing the amount of taxed income. A $200 credit, for example, will turn a $1,000 tax bill into only $800. A few could even give you a refund you weren’t expecting.

3. Deductions – Deductions are expenses that the Internal Revenue Service allows you to subtract from your AGI to arrive at your taxable income. In most cases, the lower your income, the lower your tax bill. If, for example, a single filer has income of $38,000 and $8,000 in deductions, then he would pay taxes only on $30,000. The IRS offers all filers a standard deduction amount (more on this later). Some other deductions, such as student loan interest, moving expenses, deductible IRA contributions and alimony payments, are also listed directly on the 1040A or long Form 1040. The term is most commonly associated with the itemized deductions (more on this later, too) that are claimed by taxpayers who file Schedule A.

4. Standard deduction — This is a fixed dollar amount that a taxpayer can subtract from his or her income. The standard deduction is available to all filers and is determined by the taxpayer’s filing status. The amounts change each year because of inflation adjustments; you can find the current standard deduction levels listed on each of the three individual tax forms. This deduction method is used by most taxpayers and eliminates the need for them to itemize actual deductions such as medical expenses, charitable contributions or state and local taxes.

5. Itemized deductions — These are expenses that can be deducted from your AGI to help you reach a smaller income amount upon which you must calculate your tax bill. Itemized deductions include medical expenses, other taxes (state, local and property tax), mortgage interest, charitable contributions, casualty and theft losses, unreimbursed employee expenses and miscellaneous deductions such as gambling losses. Some itemized deductions must meet IRS limits before they can be claimed. When you itemize, you must file Form 1040 and detail your deductions on Schedule A.

6. Exemption — This is an amount that the IRS lets you subtract from your income to reflect all the people who count on your income. Exemptions can be claimed for yourself, your spouse and your dependents. The IRS allows a set amount for each exemption and, as with deductions, this total is subtracted from your adjusted gross income to come up with your final, lower earnings amount upon which you must figure your tax bill. Your personal exemption amount is in addition to any deductions, either standard or itemized, that you claim.

7. Progressive taxation – This is the system in which higher tax rates are applied as income levels increase. The U.S. tax system uses progressive taxation with tax brackets starting at 10 percent and rising to 35 percent for the wealthiest taxpayers.

8. Taxable income — Your overall, or gross, income reduced by all allowable adjustments, deductions and exemptions. It is the final amount of income you use to figure just how much tax you owe.

9. Voluntary compliance — This describes the philosophy upon which our tax system is based: that U.S. taxpayers voluntarily comply with the tax laws and report their income and other tax items honestly.

10. Withholding – Also known as pay-as-you-earn taxation, this method enables taxes to be taken out of your wages or other income as you earn it and before you receive your paycheck. These withheld taxes are deposited in an IRS account and you are credited for the amount when you file your return. In some cases, taxes also may be withheld from other income such as dividends and interest.

@IRSTax

It’s now officially time to get serious about filing your 2011 Form 1040, especially if you expect a refund. Here are five little-known write-offs that could make your refund bigger or cut what you owe.

1. Medicare Insurance and Long-Term Care Premiums

You can claim a Schedule A itemized deduction for unreimbursed medical expenses, including health insurance premiums, to they extent they exceed 7.5% of your adjusted gross income, or AGI. (AGI is the number at the bottom of Page 1 of your Form 1040.) The 7.5%-of-AGI hurdle may seem insurmountable, but seniors can often clear it–especially if they remember to include the following in the medical expense pot:

*Premiums for Medicare Part B coverage. For 2011, the per-person Part B premium for most folks was $96.40 per month ($1,157 for the year). For higher-income folks, the premium could be as much as $369.10 per month ($4,429 for the year).

*Premiums for Medicare Part C coverage (so-called Medicare Advantage HMO-type coverage).

*Premiums for Medicare Part D coverage (for prescription drugs).

*Premiums for Medicare supplemental insurance (so-called Medigap coverage).

*Premiums for qualified long-term care insurance, subject to the following age-based limits for each covered person.

2. Medical Expenses Paid by Someone Else

As explained above, you can only deduct unreimbursed medical expenses to the extent they exceed 7.5% of your AGI. In a 2010 Tax Court decision, the IRS argued that a daughter could not deduct some medical expenses because she did not pay for them with her own money. Instead, her mother covered the expenses by directly paying the medical service providers. The Tax Court disagreed. The facts of the case demonstrated that the mother intended the payments to be gifts. Therefore, the Tax Court characterized the transactions as gifts from the mother to the daughter followed by payment of the expenses by the daughter with the gifted funds. So the daughter was allowed to count $24,559 of medical expenses that were actually paid by her mother in calculating her medical expense deduction. Source: Judith Lang, TC Memo 2010-286 (2010).

[Also see: If You Don’t File, Beware the Ghost Return]

Important Point: When you directly pay medical expenses for a person who is your dependent (meaning you pay over 50% of that person’s total support for the year), you can add the expenses you pay for the dependent to your own expenses and claim a deduction for the total to the extent it exceeds 7.5% of your AGI. That rule would have applied to the mother in this case if the daughter had been the mother’s dependent. Apparently she was not, so the deduction for the daughter’s expenses belonged to the daughter rather than the mother.

3. Real Estate Taxes Paid by Someone Else

The daughter in the 2010 Tax Court decision mentioned above was also allowed to claim an itemized deduction for $5,508 of local real estate taxes that were paid directly to the taxing authorities by her mother. Once again, the facts of the case demonstrated that the mother intended the payments to be gifts. Therefore, the Tax Court characterized the transactions as gifts from the mother to the daughter followed by payment of the taxes by the daughter with the gifted funds. So the daughter was allowed to deduct the taxes that were actually paid by the mother. Source: Judith Lang, TC Memo 2010-286 (2010).

[Also see: States with the most homes in foreclosure]

4. Home Mortgage Points Paid by Someone Else

Assuming you itemize deductions, you can write off points (including loan origination fees) that you pay to take out a mortgage to buy your principal residence. Surprisingly enough, you can also deduct mortgage points paid by the seller on your behalf to sweeten the deal. In fact, the IRS actually requires you to claim the deduction. If this happened to you last year, don’t ask questions! Just follow the government’s directions and claim a deduction for the seller-paid points on Line 10 or 12 of your Schedule A. Source: IRS Revenue Procedure 94-27.

5. Fees to Charge Taxes to Your Credit Card

Surprisingly enough, the IRS says you can treat credit card convenience fees paid to charge personal income tax bills (including estimated tax payments) as miscellaneous itemized deduction items reported on Line 23 of your Schedule A. Source: IRS instructions to Schedule A. This favorable rule apparently applies to fees to charge both federal and state income taxes. However, you only get a write-off to the extent your total miscellaneous itemized deductions exceed 2% of AGI (other miscellaneous expenses include unreimbursed employee business expenses, union dues, job hunting expenses, fees for tax preparation and advice, and investment expenses). Fill out lines 21-27 of Schedule A to see if you can benefit from claiming miscellaneous itemized deductions.

Source

@IRSTax

If your parent (or someone else) can claim you as a dependent, use this guide to see if you must file a return.
In this guide, unearned income includes taxable interest, ordinary dividends, and capital gain distributions. It also includes unemployment
compensation, taxable social security benefits, pensions, annuities, and distributions of unearned income from a trust. Earned income
includes salaries, wages, tips, professional fees, and taxable scholarship and fellowship grants. Gross income is the total of your unearned
and earned income.
Single dependents. Were you either age 65 or older or blind?
No. You must file a return if any of the following apply.
· Your unearned income was over $950.
· Your earned income was over $5,800.
· Your gross income was more than the larger of—
· $950, or
· Your earned income (up to $5,500) plus $300.
Yes. You must file a return if any of the following apply.
· Your unearned income was over $2,400 ($3,850 if 65 or older and blind).
· Your earned income was over $7,250 ($8,700 if 65 or older and blind).
· Your gross income was more than the larger of—
· $2,400 ($3,850 if 65 or older and blind), or
· Your earned income (up to $5,500) plus $1,750 ($3,200 if 65 or older and blind).
Married dependents. Were you either age 65 or older or blind?
No. You must file a return if any of the following apply.
· Your unearned income was over $950.
· Your earned income was over $5,800.
· Your gross income was at least $5 and your spouse files a separate return and itemizes deductions.
· Your gross income was more than the larger of—
· $950, or
· Your earned income (up to $5,500) plus $300.
Yes. You must file a return if any of the following apply.
· Your unearned income was over $2,100 ($3,250 if 65 or older and blind).
· Your earned income was over $6,950 ($8,100 if 65 or older and blind).
· Your gross income was at least $5 and your spouse files a separate return and itemizes deductions.
· Your gross income was more than the larger of—
· $2,100 ($3,250 if 65 or older and blind), or
· Your earned income (up to $5,500) plus $1,450 ($2,600 if 65 or older and blind).

You can get an automatic 6-month extension (to October 15, 2012) if, no later than the date your return is due, you file Form 4868.

An automatic 6-month extension to file does not extend the time to pay your tax. If you do not pay your tax by the original due date of your return, you will owe interest on the unpaid tax and may owe penalties.

Exception for certain children under age 19 or full-time students

If certain conditions apply, you can elect to include on your return the income of a child who was under age 19 at the end of 2011 or was a full-time student under age 24 at the end of 2011. To do so, use Form 8814. If you make this election, your child does not have to file a return.

A child born on January 1, 1988, is considered to be age 24 at the end of 2011. Do not use Form 8814 for such a child.

Resident aliens

These rules also apply if you were a resident alien.

Nonresident aliens and dual-status aliens

These rules also apply if you were a nonresident alien or a dual-status alien and both of the following apply:

1. You were married to a U.S. citizen or resident alien at the end of 2011.

2. You elected to be taxed as a resident alien.

The making work pay credit has expired. You cannot claim it on your 2011 return. Schedule M is no longer in use.

You cannot claim the alternative motor vehicle credit for a vehicle you bought after 2010, unless the vehicle is anew fuel cell motor vehicle.

If you converted or rolled over an amount to a Roth IRA in 2010 and did not elect to report the taxable amount on your 2010 return, you generally must report half of it on your 2011 return and the rest on your 2012 return. Report the amount that is taxable on your 2011 return on line 15b (for conversions from IRAs) or 16b (for rollovers from qualified retirement plans, other than from a designated Roth account).

Designated Roth accounts

If you rolled over an amount from a 401(k) or 403(b) plan to a designated Roth account in 2010 and did not elect to report the taxable amount on your 2010 return, you generally must report half of it on your 2011 return and the rest on your 2012 return.