GET SMART ABOUT INCOME TAX
8. Get Smart About Income Tax
Want to stretch your paycheck further? One way is to decrease the portion that goes to Uncle Sam by taking as many tax deductions as you’re eligible for. Deductions are specific expenses that the government allows you to subtract from your income before calculating the amount of tax you’re required to pay. Taking advantage of these tax deductions is simple.
The easiest approach is to take the standard deduction , which is simply a fixed dollar amount ($5,700 for singles or $11,400 for couples in 2009) that you subtract from your income. But you might pay even less if you itemize your deductions instead. Itemizing means listing separately the specific items that are deductible under the tax laws and then subtracting their total cost from your income.
If you choose to itemize deductions, you’ll have to fill out a tax form called a 1040 (also known as the long form). You’ll then have to list your deductions on an attachment to Form 1040 called Schedule A. Among the types of expenses you may be allowed to deduct are state and local taxes you’ve paid (or sales taxes you’ve paid), charitable donations, and certain moving, job-hunting, business travel, and educational expenses.
The only way to find out if you can save money on your taxes by itemizing instead of taking the standard deduction is to fill out a copy of Schedule A and see if the amount you’re allowed to deduct is greater than the standard deduction. Even if you find that you won’t save money by itemizing this year, this exercise will help get you better acquainted with some common types of deductions, and may help you plan things in a way that could reduce your tax bite next year.
One warning: If you don’t earn a lot, you will be tempted to fill out the 1040EZ form, which is, well, easy to fill out. The problem is that you may miss out on some money-saving deductions. Although it may take a little more time, you should take a look at the more detailed forms like the 1040 and Schedule A so you don’t pay more in taxes than you have to.
If you earn very little or have children or educational expenses, you may also qualify for valuable tax credits, which subtract money directly from the amount you owe the IRS.
Whether you owe money to the IRS or not, you will need to file your taxes. Make sure you do it. If you earn less than $56,000, you can file online for free at the IRS website. Otherwise, try www.taxcut.com and www.turbotax.com, which will let you download the forms for roughly $40 to $50.