Get a bigger check in the mail with these finance factsBy MP Dunleavey, Editor of DailyWorth.com
What's the Payoff?
By knowing how to claim the right deductions and tax credits, you'll pay less to Uncle Sam.
Why You Shouldn't Avoid It
Filling out complicated forms can be tedious and intimidating, but if you are only taking the standard deduction, you may well be paying too much. Photo by iStock.
1. Consider itemizing
There are a couple of ways to lower your taxable income, and thus pay less: You can either take the standard deduction or itemize.
· The standard deduction is a set amount that you may deduct if you do not itemize. It's $11,900 for married couples, filing jointly.
· Itemizing means adding up various separate deductions using Schedule A (an IRS form) to see if the total is higher than the standard deduction.
But is it worth the effort? My colleague Justine Lackey, president of Good Cents Bookkeeping in Ossining, NY, says many people should itemize, especially if you own your home (or bought, sold or refinanced a home), had a lot of medical bills, or gave a substantial amount to charity. If you did, what you can deduct will probably be more than the standard deduction, so itemizing would make sense for you.
☑ Go to IRS.gov and download a copy of Schedule A as well as instructions for which expenses you can deduct. Check the post office or library for these forms as well.
☑ Then gather all your records: your mortgage statement, property and school tax documents, charitable receipts, personal property taxes, expenses related to a job search and any other tax documents. Learn how to keep your documents organized and in their place. Your mortgage interest and property taxes alone could total thousands, says Justine.
If all those deductions add up to more than $11,900 ($8,700 if you're single and head of household, meaning you pay more than half of household expenses and care for a dependent), fill out Schedule A to itemize and claim that amount. If the standard deduction is higher, take that. But you're not done yet: Whether you itemize or not, there are tax credits that you may be entitled to claim, so keep reading.
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2. Take your other deductions and credits
Now that you know whether you're taking the standard deduction or itemizing, the next step is to make sure you also claim all the other credits and deductions that apply to you. You may qualify for several, in addition to the deductions you claim from Step 1.
Pull out last year's tax return, as a reminder of what you previously claimed. Next, check to see if any of these four common deductions and credits apply to you:
☑ Retirement plan or college contributions If you put money in, for instance, an IRA, a portion of that amount may be deductible. There are also credits, such as the American Opportunities Tax Credit, that parents can take on some of the money they pay for their child's tuition.
☑ Business expenses If you ran a business in which you earned money, you can deduct the cost of running it: materials, advertising, possibly your home office if it's a business-only space.
Related: Check out 9 buys that are cheaper online.
☑ Child and Dependent Care tax credit If you paid for the care of a child who is 12 or younger (day camp counts!) or a dependent (a sick parent, say) while you worked or searched for a job, you can deduct up to 35% of the cost.
☑ Earned Income Tax Credit If you have a very modest income, this credit may be available to you. Visit IRS.gov and search for "EITC Assistant" for a nifty tool to figure out whether you qualify.
3. Pick a preparer
These days most people turn to a tax prep company or use a computer program. It's probably worth the investment, says Justine, because they're likely to recoup the cost in a higher refund. Software like TurboTax or H&R Block's home version walks you through all the steps, and runs between $20 and $70 for the federal and $35 for the state return.
Some programs, such as TurboTax, come with free phone or chat support for your tax questions, and others charge ($7.95 and up). If your issue is complicated, Justine highly recommends that you run it by a trained tax advisor-an IRS-trained agent or a CPA-which some tax software companies have standing by. If you end up with a few hundred dollars more in your refund, it's worth it,.
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