2011 Tax Breaks

Here is a list of some of the tax breaks for 2010. Most of the credits and deductions are standard and available every year.

Click a tab below for quick info on each of the credits

Deduction for mortgage interest

You can deduct mortgage interest on loans on your primary and secondary homes as an itemized deduction.
You can only deduct the mortgage interest on up to $1,100,000 of loans.
The deduction is allowed under the alternative minimum tax (AMT).
There are other restrictions.

Tax-free capital gain when you sell your house

When you sell your home you may have a profit. Profit is what you sell the home for minus what you paid for it, minus the cost of improvements/additions made to the house, minus selling fees, transfer taxes, and a few other miscellaneous fees.
Generally, if you lived in this home for two of the last five years, you can exclude $250,000 of profit if you are single, and $500,000 if you are married. In rare circumstances this time requirement can be waived. You have to pay federal capital gain tax on your profit over these amounts.
This law is called the section 121 exclusion.
California conforms to the section 121 exclusion, which means that California also gives you this tax break, and you only pay California income tax on your profit over the exclusion amount.
If your home was a rental and you converted it to personal use, the exclusion amount above is reduced.

Deduction for property tax

You can deduct property tax on all of your personal homes as an itemized deduction.
Most taxpayers get a deduction for property tax paid in the year they paid it, even if they were paying for a prior year or for the following year. In other words, you can pre-pay next year's property tax and take the deduction now.
However, the deduction is not allowed under the alternative minimum tax (AMT). Also, penalties for late payment and other penalties are not deductible.
Property tax on rental homes and cars used for business must de deducted as a business expense, and thus they are allowed under AMT.
Depending on where you live you can look up the amount of property tax paid using public websites and your parcel number.

Deduction for vehicle license fee

You can deduct the property tax portion of your vehicle registration fee.
The deductible amount should be noted on the invoice for payment. If you lost your invoice and live in California then please visit the California Vehicle Registration Fee Calculator to figure out the deductible amount.

Education credits and deductions

If you, your spouse, or any of your dependents are in the first 4 years of college pursuing an undergraduate degree, you can take the American Opportunity Credit. The credit is up to $2,500, and is phased out if your income is between $80,000 and $90,000 if single, and $160,000 and $180,000 if married. If your net tax is zero, you may be able to claim part of the credit (in technical terms, the credit is refundable).
If you, your spouse, or any of your dependents are taking courses at any post-secondary school (including graduate school or courses at a community college), even if it's not for a degree, you can take the Lifetime Learning Credit. The credit is up to $2,000. It is phased out if your income is between $50,000 and $60,000 if single, and $100,000 and $120,000 if married.
If your income is too high, you will not qualify for the American Opportunity Credit and Lifetime Learning Credit, but you may be able to take the tuition and fees deduction if your income is within certain limits. This deduction is limited to $4,000 if your income is less than $65,000 if single, and $130,000 if married. The deduction is $2,000 if your income is less than $80,000 if single, and $160,000 if married. Unlike most credits in the tax code, there is no gradual phase out. If your income is higher, you get no deduction.
None of the above education credits are allowed for California.
You may also deduct student loan interest. The amount you can deduct is phased out if your income is between $60,000 and $75,000 if single, and between $120,000 and $150,000 if married. California also allows the student loan interest deduction.

Deduction for medical, dental, and vision expenses

You can deduct qualified medical, dental, and vision expenses in excess of 7.5% of your income. There is no requirement that the hospital be located in the United States.
Health insurance, medicare premiums, and long term care premiums are also valid expenses. Don't forget these, because they add up!
Deduction for over the counter medicines are generally not allowed. However, you can use a flexible spending account (FSA) through your employer, if they support it, to pay for OTC medicines. Note: in 2011 you cannot use FSA to pay for over-the-counter medicines.
The FSA can also be used to pay for all medical expenses. The biggest advantage of FSA's is that they are funded with pre-tax dollars, and they are most helpful for people who can't meet the stringent 7.5% limit above. Note: You cannot claim a deduction for expenses paid with FSA, because the money in the FSA is already not taxed.
Miles you drive to get to the hospital are also deductible. For 2010 the rate is 16.5 cents a miles. You need to keep a detailed log of the miles you drive for medical purposes.
Travel and lodging for medical purposes is also deductible, within limits.
Please refer to our medical page for more details.

Credit for dependent care

You can take a credit for dependent care expenses on your tax return. Dependent care expenses are basically daycare and amounts you pay a nanny. If you pay a nanny you have to pay him/her legally in order to claim the credit — which means that you have to: file Schedule H, withhold social security and medicare (FICA) taxes from their paycheck, match those taxes from your own funds (the employer and employee each pay half of the net FICA taxes), pay state unemployment insurance, pay federal employment (FUTA) tax, pay state disability (SDI) tax, etc.
The credit is reduced for high income taxpayers but not phased out. For high income taxpayers, the credit is $600 for one child, and $1200 for two or more.
If you are a high income taxpayer, you might be better off using a dependent care reimbursement account account (DCRA) through your employer to pay for dependent care expenses, if your employer supports it. This way you can pay for $5,000 worth of dependent care expenses with pre-tax dollars. If you have two or more kids, you can also claim a credit of at least $200.
The state of California has a dependent care credit too, but it is phased out completely if your income is over $100,000.
There are other restrictions. For example, if you are married, both of you must be working, looking for work, or in school to get the credit or use the DCRA.

Deduction for energy efficiency credits

You may get a credit for adding energy efficient fixtures to your home. This includes things such as solar panels, solar water heaters, double pane windows, etc. The manufacturer of the fixture should be able to tell you if the product qualifies.
You may have to recapture the credit when you sell your home. This is because the credit lowers your cost basis, and thereby may increase your capital gain.

Credit for adoption expenses

You can claim a credit for qualified adoption expenses, up to $13,170 per child. If you adopt a special needs child, you get the full credit even if your expenses are less.
The credit is phased out if your income is between $182,520 and $222,520.

Deduction for charitable donations

If you itemize deductions, you can deduct charitable donations to qualified 501(c)(3) charities, schools, the government, etc made in 2009.
There are limits on how much you can deduct. The IRS has 20%, 30%, and 50% limits. For example, you may be able to deduct only 30% of your income if you donate stock to a 50% organization. The remaining amount is carried over to future years, but only for the next 5 years.

California renter's credit

This credit is worth $60 or $120, and is available if you live and rent in California and your income is within limits.
The credit is not available if your income is over $34,722 if single, and over $69,444 if married or head of household.

Deduction for investment interest

If you itemize your deductions, you can deduct investment interest. Investment interests includes interest you paid to short a stock, dividends you paid when you shorted a stock, mortgage interest on a home held for investment, and so on.
Note: If you held the short position for 45 days or less, you have to add the short interest and dividends to your cost basis instead.
The amount of investment interest you can deduct must be less than or equal to your investment income. Investment income is the sum of your interest, non-qualified dividends, short term capital gains, and long term capital gains you elect to treat as short term capital gains. You have to have investment income in order to deduct investment interest.
Any amount of investment interest not allowed is carried over to future years.

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