Maximize Your Tax Breaks: Five Easy Tips
By: Ron Finkelstein | Posted: 27th March 2009
What's the difference between a taxidermist and a tax collector? Humorist Mark Twain says, "The taxidermist only takes your skin!" That's the opinion of many Americans. Indeed, ridiculously high tax bills seem prevalent. Thankfully, tax breaks give you legal options to keep more of your money for yourself and away from the government.
Tax breaks are provisions of the income tax code that reduce the amount you and your family have to pay. Some people think claiming tax breaks is cheating - something greedy corporations and rich people do - but it's not. The famous Judge Learned Hand once stated, "There is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike, and all do right, for nobody owes any public duty to pay more than the law demands." You are completely entitled to every tax break you qualify for, and not taking those breaks is only giving the IRS a gift they don't deserve.
Looking for tax break tips? There 5 rules you should remember when looking to reduce your taxes.
1. Be truthful. There's no way around it: you just have to pay taxes on any income that can't be exempted, deferred, or canceled out. If you try to hide, rename, or lie about your income you're almost positive to get audited and fined. You can even be jailed.
2. Do not bend the rules when claiming tax breaks - they are often used to help the economy or other important purposes, and can only be claimed if the terms apply to you and your household. If you are confused and need help figuring out if you qualify, ask a tax professional, because claiming something you shouldn't might be illegal.
3. Whenever possible, make use of tax credits rather than tax deductions. While a deduction reduces the amount of your taxable income, a credit directly reduces the tax you owe. As a quick example, consider a $1000 tax credit as compared to a $1000 tax deduction, assuming your effective income tax rate is 30%. The former reduces your tax bill by $1000, while the latter only reduces it by 30% of $1000, or $300.
4. Make certain you are filing the correct form; for some tax breaks, only a particular tax form will work. Not every taxpayer may file the simplified forms 1040A or 1040EZ. You may need to file the long form 1040. Read all instructions carefully, and if something is unclear, consult a tax preparation professional.
5. Always be sure to watch out for the alternative minimum tax (AMT). It is also known as the "shadow tax system," mostly because it does not follow the same rules as regular income tax. It was made in order to keep a certain minimum tax on people no matter how many deductions one qualifies for. Depending upon your income and type of income you may still have to pay the AMT.
You can start taking advantage of tax breaks today by finding out which ones you qualify for.About the Author
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Tags: irs, mark twain, provisions, tax credit, tax credits, tax deductions, taxable income, tax breaks, income tax rate, tax deduction, tax bills, legal options, government tax