Don’t Forget Your Student Loan Interest Tax Deduction

Debt Hater for Fromdebttodreams.com writes: As tax season draws closer and you start to receive your W2 forms in the mail if you are currently paying off your student loans, there is some good news. Employers must send your W2 forms in the mail by January 31st, and your student loan provider must also provide you with a form by this date. This form is known as 1098-E and it will show you the amount of student loan interest that you paid during the year. You can then use this form (or multiple forms from multiple lenders) to take a student loan interest tax deduction.Normally the only type of loan interest that is deductible from your taxes is from mortgages, but in the case of student loan interest there is a special deduction that you can use to your advantage. You can deduct up to $2,500 in student loan interest, and while this isn’t perfect – it definitely helps. Most people will not hit this amount and it has not changed from 2012. I know that I will personally hit this cap and probably even go over, but there’s nothing we can do about it right now.

You are also only allowed to take the student loan interest tax deduction if your modified adjusted gross income is less than $75,000 or $150,000 for couples that are filing jointly. This covers probably 95% of people, but I’d personally like to see this raised even higher. I know that most doctors and other medical professionals are usually able to secure a six-figure salary, but many times they also have six-figure debt! A deduction to student loan interest would be extremely helpful for these young professionals, and give them more disposable income to put towards a house, cars, etc. Many people in my generation are delaying large purchases due to their massive student loan debt.

You also need to remember that you can only deduct this income for student loans, not for a personal loan you took out for school, or maybe a student loan that you converted to a personal loan. Both government and private loans count here, and private loan providers should also provide you with a 1098-E form. The student loan has to have been used for the following expenses/purchases:

1. Tuition
2. Room and Board
3. Books and Supplies
4. Other Expenses like transportation

The final piece that you need to know about the student loan interest tax deduction is that you don’t need to itemize in order to take this deduction. You don’t need to file a Schedule A and use the itemized deductions form. You can simply use a 1040A form, take your standard earned income tax credit and then also take student loan interest tax deduction. You can not use the 1040EZ form if you plan on taking your student loan deduction! For a little extra effort, I think it’s worth it to lower your taxable income for up to $2,500.

Comments:

2 THOUGHTS ON “DON’T FORGET YOUR STUDENT LOAN INTEREST TAX DEDUCTION”

1. Nsheils on January 21, 2014 at 9:47 pm said:

   I tried to take my 2500 deduction, but since I’m married filing separately I can’t. It definitely felt like a punch in the face when I saw that $19,000 in interest spelled out for me on the form! But this was my first year of repayment and it should all be gone by 2016.

   Reply ↓
   • Debt Hateron January 22, 2014 at 5:44 pm said:

     Wow, that is a ton of interest! Seeing how much money went to interest right in front of your face sucks, I agree with you. The only good thing is that it only goes down from here on out. You must have also made a lot of progress on your loans though, especially that you are going to be able to pay all your loans off in about 3 years. I’m assuming that you made more than the $75,000 to claim the deduction based on the amount of interest you paid back?

     Reply ↓

If You Contribute To A 401k, Check Your Fees!

Tony Roylance for Seeking Alpha writes: Like most advisors who provide retirement planning advice, I have several clients that also contribute to their workplace 401k or 457 plans (the public sector employee equivalent). While managing their individual IRA's I also agree to look at their workplace retirement plans to create an overall financial picture. As I have several clients involved in public safety, and my experience serving on the pension boards of two public safety entities I am most familiar with the 457 deferred compensation program. One 457 provider is a nationwide company that is primarily in the insurance business. This company provided it's participants a list of about 20 different mutual funds with all asset classes appearing fairly represented. I was initially impressed with the offerings. Then I decided to do a little digging.

I started by placing a phone call to their advisor information line. I was told that the mutual funds were not actually mutual funds at all, but variable annuities that were designed to closely track the underlying mutual funds. In fact, I was told that there was no ticker symbol that they could give me to track the actual product my clients were invested in. Now I was really intrigued. A little more digging and I discovered that variable annuities that track underlying mutual funds contain a thin layer of insurance protection -- and a fat layer of extra fees. How much in fees is anyone's guess, it is not easily discoverable information. The disadvantages of the 457 plan compared to the 401k are numerous and beyond the scope of this article (however if there appears to be interest I will write an article specifically geared towards that audience). What this exchange opened up to me was a need to take a closer look at fees.

Most of the audience of Seeking Alpha I would imagine are stock traders. As stock traders with relatively high numbers of round trip trades we quickly realize the value of lower commissions in our trading. However, lower is not necessarily better. Early on in my trading career I tested using a broker that offered near $0 commissions on market orders. While watching a Level 2 quote screen I would execute a "buy at market" order from my discount broker and my fill would be 0.25 above the Ask. On a 100 share lot, that's $25, well above the commission charged by the discount brokers that allow direct routing. So much for zero commission trading.

For mutual funds and ETF's we now have a fantastic tool created by FINRA, called the Fund Analyzer. Found here:apps.finra.org/fundanalyzer/1/fa.aspx. Using this tool I took another look at one of my clients statements from his 457 plan. This is a typical statement that shows the funds available, the transaction page shows total gains and losses with no mention of fees.

Nothing to indicate the potential minefield of fees we have just wandered into. Let's take some of these funds and type their tickers into FINRA's mutual fund analyzer. For comparison I will include the S&P 500 Spyder ETF (SPY), all assumptions will be equal with a 0% return and an investment of $49,000 (to highlight only the fees portion).

I then added the rest of the tickers and created this spreadsheet for my clients involved in this plan.

You can see that there are more than a few "fee land mines" in this client's retirement plan.

With volatile and uncertain markets sure to remain in the foreseeable future avoiding excessive fees is going to be key to all of us reaching our retirement goals.

Business Tracking Tool LivePlan Now Compatible with Online Accounting Tool Xero

Users of Palo Alto Software’s online business planning and performance tracking tool, LivePlan, can now import accounting data from Xero’s online accounting software to allow business owners to better plan and track their business’ key financials from a single platform.

LivePlan helps small business owners easily develop budgets and forecasts, create business plans and then track their progress. Entrepreneurs now have the ability to import financial information from Xero’s cloud-based accounting software directly into LivePlan to easily track their actual results compared to their budget and forecast. LivePlan is also compatible with QuickBooks desktop accounting data.

“Xero is fast becoming a popular and successful cloud accounting tool, and by integrating with LivePlan, we offer Xero users the ability to better plan and track their business’ financials,” said Sabrina Parsons, CEO of Palo Alto Software. “Simply relying on the accounting data alone isn’t enough. Business owners need to create a budget, and sales forecast, thereby setting goals. They can then manage against those goals with their actual accounting data with the LivePlan Scoreboard. ”

Creating a manageable plan, budget and forecast is crucial to business success. In fact, businesses that plan ahead grow 30 percent faster according to a Cranfield University study. Xero offers business owners the crucial accounting data they need to do this, but LivePlan helps them use the information to stay on track, and make critical business decisions.

"LivePlan is part of a new breed of cloud services that helps business owners better understand the meaning behind their financials,” said Jamie Sutherland, President of Xero's US business. “We’re excited that LivePlan now integrates with Xero, as we believe the organization offers exceptional tools for planning ahead, setting goals, and tracking key financial metrics.”

LivePlan users are able to access their accounts at any time or location with internet access. The tool imports Xero data automatically, and will use the information to complete pre-selected calculations and display results in an easily digestible format. LivePlan is available for $19.95 a month or $139.95 annually.

Tactically Trade The S&P 500 In Your 401k

Tony Roylance for Seeking Alpha writes: "The art of prophecy is difficult, especially with respect to the future." - Mark Twain

As most of you know, I focus most of my research on developing tactical investing strategies that follow the major market indexes specifically, the S&P 500 large cap index (SPY), the S&P 400 midcap index (MDY), and the Russell 2000 small cap index (IWM). Mutual funds or annuities that track these indexes are present in almost all 401k plans, and an individual investor can implement an effective strategy using these 3 indexes alone.

Tactical Investing

Let's start with what tactical investing is not. Tactical investing is not "market-timing". Tactical investors make absolutely no predictions about what the market is going to do. George Soros in his book The Alchemy of Finance states, "My financial success stands in stark contrast with my ability to forecast events…all my forecasts are extremely tentative and subject to constant revision in the light of market developments."Tactical investing focuses on what the market is doing at the present time. That means, we buy when the market has turned up after a correction, but before it has risen too far-and we sell when the market turns down, but before it has declined too much. We attempt to be invested in an appropriate asset allocation in the direction of the primary trend. The asset allocation is going to be dependent on your own risk tolerance and investment duration.

There are several different paths investors can take to reach the same destination. "Buy and Hold" is a perfectly acceptable investment strategy, purchasing quality companies at a discount and holding them until their true value is realized. Unfortunately, "Buy and Hold" didn't work for me. I would buy quality companies at a discount, but they would become even more discounted-and then even more. I couldn't stand watching my account dwindle until I finally couldn't take it anymore and sold. I had to find another way of investing in the market and began my quest 16 years ago.

The earlier you choose one that is most in sync with your belief system, and have the discipline to stick with it, the better off you'll be. An investor can choose anything from Ben Graham's long-term valuation techniques, to buying high-yielding stocks, to buying strong stocks with virtually no yield. Numerous techniques can make money in the market, you must choose the one that is most agreeable to you to have the discipline to follow it.

Implementing in a 401k

The 401k retirement plan is the primary vehicle that most Americans will use to fund their retirements. Americans have been told by Wall Street that if they contribute enough money to their plans over a long enough time period, that there should be enough money for them to retire. Once or twice a year, you may have a meeting with your "financial guy", who will put your information into a financial program that will estimatewhether or not you will have enough money to retire at a certain age. If the program estimates a shortfall, you have 3 choices, 1) increase your contribution, 2) work past your anticipated retirement age, or 3) lower your expectations for the type of retirement you envision. None of those options are very pleasant. What if there was another way? What if there was a way that we could generate a greater return in retirement plans? If we are using a tactical model to assist in limiting risk, then when we are invested we can choose investments that provide a greater return. We can also use a tactical model to assist us in investing our deferrals.

Top Down Approach

401k's almost always have a limit on the number of transactions that participants can do per quarter or per year. We must design our model so that it trades less than a dozen times a year. I must also design a model so that readers of Seeking Alpha that don't have access to sophisticated charting programs can also use it. Price is the most important variable in any trading model, and the moving average is commonly used to gauge the strength or weakness of price. In this case, I have the S&P 500 on a weekly timeframe starting January 5, 1990 until November 29, 2013. Investors can use a very simple basic trading strategy of buying when the S&P 500 closes above its moving average, and selling when it goes below. I have run a test to find the optimum number of weeks to use for the moving average. In this case, it is 52 weeks, 1 year.

(click to enlarge)

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The most striking thing is that this simple moving average test did not significantly beat a buy and hold investor, especially once you factor in transaction charges and fees. What the simple moving average excels at, is limiting risk and limiting loss. When applying a long-term moving average, you are essentially adding protection to your retirement account. Your risks of being invested in the middle of a devastating bear market are greatly reduced. The cost of that protection, or premium if you will, is going to be a number of "whipsaws" and false signals. Personally, that is a cost I'm willing to pay.

We don't want all our eggs in one basket

Price is very important, but for proper interpretation we must also look at it in a broader context. Let's add an economic measure as well. There are literally hundreds of economic data series that I have looked at in my analysis of the market. One of the closest I watch, predominantly because the Fed watches it too is the employment situation. When the economy is growing, more people have jobs and fewer are laid off. Alternatively, when the economy is contracting, fewer people have jobs and more are laid off. People who are out of a job usually apply for unemployment insurance. By watching the number of people applying for unemployment insurance, both initial claims and continuing claims, we can quickly monitor the overall economic condition. I have also plotted a linear regression of the continuing claims number since 1990. This chart demonstrates that both continuing claims and initial claims for unemployment are falling, and below a linear regression line. Both of these are signs of underlying economic growth.

(click to enlarge)

Finally

First we developed a long-term average that we have tested and found it to have gotten us out of both of the previous bear markets. Using this, we can limit our risk and while not getting us out of smaller corrections, may hopefully get us out of the market before a truly devastating bear market hits.

Next, we used an economic indicator confirm the moving average signal. If the economic indicator is showing a sharp rise in initial claims or continuing claims, that would be a time to be cautious and perhaps move into more conservative investments.

Finally, when we are contributing our deferrals into our accounts, we can watch another indicator to tell us the optimum times to contribute.

Look again at the long-term moving average chart at the top, the last signal was a 'BUY' signal from November 23, 2012. Using the stochastics oscillator with the default settings 14, 3, 3 - we can demonstrate the optimal buypoints for you to add money to your 401k.

(click to enlarge)

Following this indicator, you are fulfilling the first half of being successful in the market, "buying low".

Combining a long-term strategy with both price and economic inputs, and then using a short-term technical indicator to tell us optimal buy points will go a long way to make you a more effective long-term investor. Using these strategies should greatly enhance your returns, limit your risks, and hopefully make you sleep more soundly at night.

This is a very simple basic system that any investor can use to allocate money over time into their retirement plan. If anyone would like to communicate further on trading strategy development, feel free to message me.

TaxACT Launches New Smartphone App, TaxACT Express, for Free Federal Tax Filing

TaxACT®, the critically acclaimed leader of affordable tax solutions, has launched a new smartphone app for taxpayers with straightforward situations to prepare, print and e-file tax returns. TaxACT Express™, available for Android and iOS, includes everything consumers need to securely file federal returns easy, fast and free from a smartphone.

"TaxACT Express expands consumer access to free federal tax filing, empowering you to start and finish on a smartphone, tablet or computer," said TaxACT President JoAnn Kintzel. "TaxACT Express has a unique set of features and services that give you the freedom to do all or some of your taxes on a smartphone for free."

Easy, fast filing

The streamlined Q&A interview covers basic information, income, deductions and credits. Express users can start and stop at any time, then pick up right where they left off. Interview questions can be bookmarked, allowing users to quickly and easily return to specific questions.

TaxACT Express supports all of the following tax forms and situations:

• Wages and salary (W-2)
• Dependents and dependent credits
• Interest income (1099-INT)
• Dividend income (1099-DIV)
• Education credits and deductions (1098-E, 1098-T)
• Unemployment compensation (1099-G)
• Earned Income Credit
• Retirement Savings Contributions Credit

Taxpayers with additional situations can finish and file with TaxACT Online using a browser or with the tablet app that support all tax situations and all e-fileable forms.

TaxACT Express includes a one-of-a-kind Examiner Series that provides a detailed summary of the topics and amounts that determine the user's total income, deduction, credit and tax amounts.

The app also features a dynamic dashboard with fast navigation tools and key information about the user's returns, including federal and state refunds or amounts owed that update as users answer questions. Users can tap on their refund or liability amounts at any time to view a summary of their return.

After users complete the interview, TaxACT Alerts checks returns for potential errors and missing information. All individual federal returns are backed by TaxACT's maximum refund, accuracy and satisfaction guarantees.

To prepare, print and e-file a state return in TaxACT Express is just $7.99*, a fraction of the cost of other smartphone apps. Payment isn't required until users print or e-file.

Start, file & track your return anytime, anywhere

TaxACT Express is compatible with TaxACT Online solutions, giving taxpayers the unprecedented option to start, file and monitor the e-file status of their returns on a smartphone, tablet or computer – all with the same username and password. Express users can finish and file through the smartphone app, a web browser or through the tablet app. Conversely, taxpayers with simple returns who start in TaxACT Online web and tablet products can finish and e-file in Express.

Regardless of which TaxACT product is used to e-file, all users can use Express' dynamic dashboard to track the status of their e-filed federal and state returns and their federal refund. Users can also check their return and refund status by signing into TaxACT Online, at efstatus.taxact.com or with TaxACT's companion apps.

Fast refund options

TaxACT Express and TaxACT Online guide users to their guaranteed maximum federal refund the fastest way possible with free IRS e-file and direct deposit.

TaxACT users can also receive their refund on a prepaid debit card. TaxACT Express is the only smartphone app to offer a prepaid debit card without an enrollment fee.

To download or learn more about TaxACT Express and TaxACT's other mobile apps, visit www.taxact.com/apps.

*Prices subject to change. Express users who file with TaxACT Online using a browser or with the tablet app are subject to applicable TaxACT Online pricing.

Bitcoin Tax Checklist

Jason M. Tyra for BitCoinMagazine writes: Last year was very kind to Bitcoin. So kind, in fact, that for the first time, many previously casual Bitcoiners are finding themselves with substantial and unexpected gains to declare to the IRS. The good news is that taxpayers with Bitcoin activity to report are generally subject to the same rules and should enjoy the same deductions and credits as for other types of income. Here is a short list of special considerations that you can use as a checklist for yourself or as a starting point for a conversation between you and your tax preparer.

Decide how to file. Bitcoins received in connection with a trade or business or received as wages are subject to ordinary income treatment at the time received. Bitcoins held for less than a year prior to disposal may either be declared as short term capital gains or foreign exchange gains, which also subjects them to ordinary income treatment. Bitcoins held longer than a year prior to disposal may either be declared as long term capital gains (with proper records) or foreign exchange gains. Since the IRS has issued no definitive guidance yet, taxpayers remain free to take the treatment of their choice for federal income tax reporting.

Consider whether you might benefit from a request for a private letter ruling from the IRS. The IRS releases a list each year of tax issues for which it will not issue private letter rulings because they are currently in litigation, pending legislative action or under study. The latest list issued January 2 (see Internal Revenue Bulletin 2013-1) doesn’t mention Bitcoin, virtual currency, crypto currency or anything similar. This means that, for taxpayers with substantial gains to report, the time and expense associated with obtaining a letter ruling may be justified by the peace of mind gained by having one.

Consider theft and casualty losses that might have occurred during the year. In addition to being a year of tremendous gains, 2013 was also a banner year for Bitcoin thefts. In one particularly noteworthy incident, an unknown person or persons allegedly stole at least 96,000 Bitcoins from now-defunct Sheep Marketplace. A large number of Bitcoiners also lost money to frozen accounts (for various reasons, but mostly due to regulatory action) and failed exchanges. Finally, Bitcoins held in cold storage paper wallets or on crashed hard drives might have also been lost. Total, permanent, irreversible losses can be claimed to the extent of gains, as long as taxpayers can prove that the losses actually occurred. Theft and casualty losses can also be claimed as deductions independent of gains under certain circumstances.

Consider whether your Bitcoin activity qualifies as a trade or business or as a hobby. In order to be considered a trade or business, an activity must have a profit motive. The IRS bases its profit motive determination during audits on a number of tests and other objective characteristics. For example, the IRS considers expectation of profit in at least three of five tax years to be a key factor in making this determination. If Bitcoin activity can properly be called a trade or business, then Bitcoin related expenses will most likely be fully deductible. However, business income may also be subject to self-employment taxes. If a hobby, then Bitcoin hobby expenses are deductible only to the extent of hobby gains. Net operating losses can be carried back up to five years and forward up to twenty years. Hobby losses cannot be carried back or forward.

Claim the applicable deduction for capital expenditures made during the year. Capital assets, such as mining peripherals or computers, must be depreciated over time, but may qualify for Bonus Depreciation or Section 179 treatment for 2013. These special provisions and others, collectively known as “tax extenders” expired at the end of 2013 and have not been renewed. For 2014 and later, lower limits on Section 179 expense and Bonus Depreciation remain in effect. Expenditures that exceed the lower limits must be capitalized and depreciated.

Don’t forget to include Bitcoin activity when calculating the net investment income tax. If you are (un)fortunate enough to have modified adjusted gross income over the threshold amounts ($200,000 for single taxpayers, or $250,000 for those who are married filing jointly), Bitcoin gains may be subject to the net investment income tax. The statutory definition for net investment income includes interest, dividends, capital gains, rental and royalty income, income from businesses involved in trading of financial instruments or commodities and businesses that are passive activities to a taxpayer. Bitcoin may fall into several of these categories, depending on your personal circumstances. Non-passive business income is not subject to the tax.

Declare foreign banking activity by filing a Foreign Bank Account Report (FBAR), if necessary. United States persons (citizens, residents and entities created in the United States) must file the FBAR if, at any time during the year, they had a financial interest or signature authority over a foreign financial account with a value of more than $10,000. A wallet with an exchange located in a foreign country, such as Mt.Gox, would cause the taxpayer to be subject to the FBAR rules. Note that the reporting threshold applies to your account balance on every day of the year, not his average balance or balance on just the last day. The FBAR threshold is also crossed when multiple foreign financial accounts have an aggregate value of greater than $10,000.

This list should serve as a starting point for working through your Bitcoin taxes. It is not all inclusive. There are almost always exceptions, loopholes and workarounds. Always consult a qualified tax professional before taking an uncertain tax position.

5 Ways to Save on Your 2013 Tax Return / Reducing your tax burden doesn’t have to be complicated with these strategies

Barbara Weltman for US News World Report writes: Knowing what you're entitled to write off on your tax return might seem complex and mysterious, but it doesn't have to be. Here are five easy ways to pay fewer taxes:

1. Check for ordinary losses on stock losers.

Last year was a great year for the stock market, but not every investment was a winner. Ordinarily losses on the sale of stock are deductible as capital losses. These losses can offset capital gains (including capital gain distributions from mutual funds) as well as up to $3,000 of ordinary income ($1,500 for married persons filing separately).

But you may be able to obtain even better tax results if the stock was in your own corporation or another closely-held corporation that meets the requirements to be treated as "Section 1244 stock." That means if you invested in your brother-in-law's business that meets the Section 1244 requirements and it failed, causing you to dump the stock for pennies on the dollar or you simply walked away, then you can deduct up to $100,000 of losses as ordinary losses on a joint return ($50,000 for singles). Losses in excess of this dollar limit are treated as capital losses subject to the limits above. (IRS Publication 550 spells out the details of this rule.)

2. Check for worthless securities.

Unfortunately not all investments work out; some corporations—public or closely-held—go belly up, leaving investors with worthless stock and other securities. If you have a security that's become worthless, you can deduct your loss. You're treated as having sold the security on the last day of the year in which it became worthless.

You have seven years from the year in which worthlessness occurred to file a refund claim, so look for securities you owned that became worthless in 2006 or later so you can file a refund claim before April 15, 2014.

Caution: The stock must be completely worthless. The fact that a company declares bankruptcy does not mean its stock is worthless. Remember that Kodak filed for bankruptcy protection in 2012 and all looked hopeless, but Kodak emerged from bankruptcy and its stock was relisted on the New York Stock Exchange in November 2013.

3. Pay no tax on gain from your home sale.

Did you sell your home in 2013? If you owned and used it as your principal residence for two of the five years preceding the date of sale, then you can exclude from income the gain up to $250,000, or $500,000 on a joint return. If you bought your home a long time ago and had a large gain, you may still use this shelter to avoid paying any tax on the sale by correctly figuring your tax basis and gain realized.

Gain is the difference between the amount realized (the selling price less broker's commissions) and your tax basis. Tax basis is the original cost of the home increased by capital improvements you made to it over the year. Capital improvements include a new roof, an addition, fencing, a new alarm system or even new appliances. IRS Publication 523 gives an overview of this rule.

Caution: If you took a home energy tax credit in past years for adding insulation, storm windows, or solar panels, then you must reduce your basis for these capital improvements by the amount of the credit.

4. Deduct your out-of-pocket costs for charity.

If you do volunteer work for a nonprofit organization and itemize your personal deductions, then you can write off the expenses you incur. For example, if you deliver meals on wheels in your car, you can deduct your costs at the rate of 14 cents per mile (provided you have a record of this driving).

If you buy items on behalf of a charity, then you can deduct these costs as long as you correctly substantiate your costs. Receipts aren't enough if the costs are $250 or more. In this case, you need a written acknowledgment from the charity.

Note: You can never deduct the value of your time and effort expended on behalf of a charity. IRS Publication 526 contains more details about the ins and outs of this approach.

5. Make smart tax elections.

The tax law has many elections that allow you to choose the most beneficial way to handle certain tax items. For example, if you suffered a casualty loss in a FEMA-declared disaster in 2013, you can opt to deduct the loss on an amended return for 2012. Or, if you'd get a bigger write-off in 2013 because your adjusted gross income (the threshold for claiming this deduction) is smaller, simply claim your loss on the 2013 return. FEMA disaster declarations are listed at www.fema.gov/disasters. If you sold property on an installment basis, then you can choose to report it all on your 2013 return rather than spreading the gain over the years in which installment payments are received. This choice makes sense if you have losses now to offset the gains.

If you prepare your own return, your tax software should ask questions to help you chose the most favorable option; tax pros should do the same.

Keep in mind that the IRS won't voluntarily send you a refund; you must file a return showing why you're entitled to it. To hold onto more of your hard-earned money, take the time to see what you might be missing by considering the strategies that apply to your own life.

Tax costs for poorly timed stock transactions

Kay Bell  for Bankrate.com writes: Your portfolio took a beating, but you were able to use that to your tax advantage by selling some losers. Now one of your former stocks has turned around and you want it back.

Don't be in too big of a hurry to call your broker. If you repurchase the stock too soon, you'll violate the wash sale rule. This regulation prohibits a shareholder from selling a holding at a loss, using that loss for a tax break and then turning right around and buying the same or similar stock.

It's designed to prevent the deduction of what the IRS calls "noneconomic losses." Essentially, in the eyes of the Internal Revenue Service you never really sold the stock. Your repurchase indicates to the tax agency that you believe in the investment itself but the whole purpose behind the transaction was to generate a tax loss. "You just sold it to book that tax loss, and the Internal Revenue Service is not going to let you do that," says Jim Van Grevenhof, senior tax analyst from the Tax & Accounting business of Thomson Reuters.

Most investors encounter the regulation when they reacquire a stock soon after selling, but it works the other way, too.

Specifically, the law says you may not take a tax loss on a security sale if you have obtained the same or a substantially identical security 30 days before or 30 days after a sale. So don't try to get around the rule by buying more of a stock just before you dump the poorly performing shares you already own.

No loss now, but later

When a stock transaction violates wash sale guidelines, the IRS will not let you take the tax break immediately. However, all is not lost.

For tax purposes, the deduction of your loss is postponed to a later date. That is, the disallowed loss is added to the cost of the new shares you bought. This gives you the tax basis for the holdings, which you'll use when you sell the reacquired securities.

For example, Joe bought 100 shares of Stock A for $1,000 and sold them for $750, producing a $250 loss. Fifteen days later he bought 100 new shares of Stock A for $800. Because Joe bought identical stock, he can't immediately take the loss. But he can add the disallowed $250 to the $800 price of his new shares, producing a basis of $1,050 for the new shares. When Joe sells his reacquired Stock A shares, the adjusted basis will, depending on the sales price, produce a bigger loss to claim or reduce any taxable gains.

And don't try to skirt the rule by buying a call option on the stock. "Say I bought a stock at $30, it went down to $20 and I want to sell it and claim the $10 loss. Then a day or two later, I buy a $20 call on the stock," says Van Grevenhof as way of illustration. "What I hope is that the stock will go up. That's the same thing as buying actual stock and it violates the wash sale rules."

What exactly is identical?

The wash sale timing considerations are pretty straightforward. That's not necessarily the case for the rule's other key component: the nature of the sold and repurchased stock.

Investors who deal in individual stocks usually don't have problems. It's easy to tell what stocks the IRS might deem substantially similar. Just how does the same asset rule work for investors who trade mutual funds?

Let's look at Joe's portfolio again. This time he's closing out his Fidelity XYZ Growth Fund account at a loss. He believes, however, that the sector is poised for growth, so he uses his XYZ proceeds to immediately buy shares of Pioneer XYZ Growth Fund. Since both funds are invested in telecom holdings, has Joe violated the wash sale rule?

No, says Van Grevenhof. As far as the IRS is concerned, the Fidelity and Pioneer funds are not essentially the same investment.

But be careful with exchange-traded funds, or ETFs. "I sell my IBM stock and book a loss," says Van Grevenhof. "I can't buy IBM for 30 days and there is no other similar stock I want to buy, so I buy an ETF in a computer industry fund. That's not a problem. But say that industry ETF buys computer-type stocks and 2 percent of the fund is IBM. Theoretically, the IRS could come back and say 98 percent is OK, but you owe tax on the 2 percent."

So far though, says Van Grevenhof, that's never happened. But the possibility it could is good to know, just in case the agency ever decides to make it an issue.

And the IRS always has the power to disregard what it considers a sham transaction. Even if you made it look like a substantially different security, if the IRS identifies that there is no economic substance to the transaction, it will disallow the loss.

IRA swap eliminated

Some investors had tried to work around the wash sale rule by buying the sold or similar stock for an individual retirement account, or IRA. In these cases, they argued, because the retirement plan -- Roth or traditional -- is separate from the taxpayer's individual personal holdings, the wash sale rules shouldn't apply.

The IRS, however, has officially nixed such transactions as a way to circumvent the wash sale rules.

In Revenue Rule 2008-5, published Jan. 22, 2008, the IRS says "if an individual sells stock or securities for a loss and causes his or her IRA or Roth IRA to purchase substantially identical stock or securities within a specified period, the loss on the sale of the stock or securities is disallowed under section 1091, and the individual's basis in the IRA or Roth IRA is not increased by virtue of section 1091(d)."

Essentially, that means the IRS recognizes that the individual investor and the IRA investor are one person, so the wash sale rules apply.

Amazon aims for piece of tax refund action through TurboTax

Richard Mullins for TBO.com writes:  Mom always said, don’t count your chickens before they hatch. But Amazon and TurboTax are hoping you might divert some of your tax refund their way before it even arrives.

This year’s version of the TurboTax software has a new feature installed at the final step of the tax preparation process. If the software calculates that you have a tax refund coming your way, it will automatically ask if you want to use part or all of the return to buy an Amazon Gift card. The motivation: An extra 5 to 10 percent on every dollar you divert, depending on the version of TurboTax people use. The Federal Free edition can generate an extra 5 percent, while the TurboTax Deluxe version offers an extra 10 percent. So a hypothetical $500 diversion can turn into a $550 Amazon Gift card. This is an exclusive arrangement, according to Amazon’s PR firm, Weber Shandwick. Officials with Intuit, which produce TurboTax, could not be reached for comment.

This means, at the moment users feel like they’re about to get a load of extra money from a tax return, Amazon is right there to help spend it. That page of the software helpfully includes suggestions of what people can buy on Amazon, with photos of sparkling jewelry, a tablet, books, “even groceries!”

Amazon and TurboTax started this match-up for the first time this year, and it offers each company a perk. For Amazon, it guarantees a flow of future purchases in the Amazon system, and potentially generates more profit as consumers often forget to use all the value on their gift cards. For TurboTax, it can attract more users for the online tax software by offering essentially free money to anyone who receives a refund.

Both companies see a huge pool of potential customers. TurboTax processes millions of tax returns each year. That also targets a specific pool of the U.S. taxpaying group — people who set aside more for taxes than they could have. That’s because the personal tax system lets people essentially have more money pulled from their paychecks than necessary to pay that week’s federal taxes. Then when taxpayers calculate their full-year tax return, that extra money becomes a “refund” back to them. Many personal finance experts advise against doing this, as it counts as an interest-free loan to the government, and that money could have been bearing interest in an account until tax time.

In past years, the TurboTax software offered two basic choices: Have the IRS mail a check to the taxpayer or have it direct deposited in their checking account. (An extra option lets people pay the fee for the TurboTax system out of their tax return.)

TurboTax rival H&R Block has a somewhat similar offer, an Emerald Card that’s a fee-based debit card where customers can have their refunds deposited for future use, and even for paying their H&R Block tax preparation fees.

“I guess it’s just another example of companies trying to monitize their customer lists,” said Carla Smith, a CPA and partner with the Sarasota financial planning and accounting firm Plush Smith. She found the Amazon project with TurboTax, “a savvy one,” but “egads, I think it’s gone overboard.” Too often, she said, people perceive a big tax refund as a windfall, when in fact, “it’s your money to begin with,” she said, because it was taken out with each paycheck in withholdings, and the refund process merely gives you back the difference.

Unfortunately, the TurboTax/Amazon system doesn’t work in reverse. People who end up having to write a check to the Internal Revenue Service don’t get anything extra from Amazon.

6 reasons you may face higher taxes this year

Ray Martin for CBS writes: Some people filing their 2013 tax returns are probably in for a nasty surprise.

Last year's passage in Congress of the American Taxpayer Relief Act actually increased taxes for all working Americans. But it also included some big changes that means higher income taxpayers could get snagged by more taxes on income and the loss of many deductions. Here are six tax changes that could have a significant impact on what you will owe when you file your 2013 tax return: 

1. Higher tax rates on ordinary taxable income. For workers with higher incomes, the higher tax rate of 39.6 percent will replace the 35 percent rate. That new higher rate applies to single filers with taxable income above $400,000; married filers with income over $450,000; married filing separately over $225,000; and heads of household with taxable income over $425,000. 

For instance, due to this tax hike a married couple with a taxable income of $500,000 will owe an additional $2,300.

2. Higher tax rates for long-term capital gains and dividend income. For people in the higher-income groups below, the rate on capital gains and dividend income increases from 15 percent to 20.

A married taxpayer with a taxable income of $500,000, along with $20,000 in capital gains and $20,000 in dividend income, would pay an additional $2,000 of income tax.   

3. Medicare surtax on investment income. A part of Obamacare, this tax is designed to raise federal revenue to offset the cost of things like the government subsidies provided to lower income people who buy health insurance on the new health exchanges.

The Medicare surtax amounts to an additional 3.8 percent on on net investment income, which is income from interest, dividends, tax exempt bond interest, royalties, rents, capital gains and so forth. This tax applies to taxpayers with modified adjusted gross income that exceeds $250,000 for married filers and $200,000 for singles. In total, high-income people must pay a tax rate of 23.8 percent on capital gains and dividends. 

So for the married taxpayer mentioned above -- with $20,000 in capital gains, $20,000 in dividend income and $10,000 in interest -- would pay an additional $1,900 of income tax due to this change. 

4. Medicare surtax on self-employment income. Beginning in 2013, an additional 0.9 percent was levied on people whose combined salary and income from self-employment is above $200,000 for singles and $250,000 for marrieds. This was another tax increase aimed at raising revenue to offset the cost of the new health care laws.

If you are married, and have net income from self employment of $500,000 in 2013, this additional tax will cost you $2,250 this year. 

5. Phase-out of the personal and dependent exemptions. Starting with 2013 tax returns, more folks will see a reduction in the personal and dependent exemptions they could claim in past years. Taxpayers with Adjusted Gross Income (AGI) levels of $250,000 for singles, $300,000 for marrieds, $275,000 for head of household and married filing separately of $150,000, will see the loss of some or all of their previously allowed personal and dependent exemption deductions.

That means a couple with two dependent children with AGI over $500,000 could pay an additional tax of $6,200, or more.

6. Phase-out of itemized deductions. Taxpayers with higher incomes will also lose a portion of the deductions they claim for things like mortgage interest, real estate taxes and charitable gifts. Taxpayers with the same AGI levels as above -- singles at $250,000, married jointly at $300,000, head of household at $275,000 and marries filing separately at $150,000 -- will see their deductions reduced by an amount equal to 3 percent of their adjusted gross income that is above these thresholds. This can wipe out up to 80 percent of the deductions some taxpayers would have been allowed to claim in 2012.

A couple with about $40,000 in itemized deductions with AGI about $500,000 could pay an additional tax of $2,376.