Put the Fun Back in Tax ReFUNds

Taxes... Say that word and many people will start to groan when they hear it ...and with good reason. To begin with, paying annual taxes is usually a financial burden for most people. Each time you review your paycheck, you might feel cheated or abused, considering the federal income tax withholding amounts (let's not even mention state taxes or Social Security or Medicare taxes).

It is certainly possible to combat the depressing season of tax time. You may find it helpful to remember that there are a number of tax deductions for which you may qualify based on tax regulations. These deductions prevent you from having to pay tax on specific economic benefits. Additionally, they may enable you to deduct certain income expenditures, or even directly from the cost of your tax bill.

Tax Credits and Deductions

The following list of five items, under current federal tax regulations, provide tax advantages:

1. Tax-free income is money you get that you do not have to pay taxes on. Tax exclusions or exemptions are examples of tax-free income. Most of the time, you do not have to report items such as these to the IRS since it does not affect your tax calculations.

2. Capital gains are profits you get from selling or exchanging property that has been held for at least a year or more. These capital gains, which are considered long term, will be subject to reduced tax rates, in comparison with taxes for other types of income, like salary or income from interest. Regular stock dividends, as well as stock mutual funds, get taxed with the same lower rates as capital gains.

3. Tax-deferred income is money that's not currently taxed. Because income grows without a reduction for the current tax, you might accumulate a bigger amount as time passes. That being said, at some point, your income will become taxable.

4. Tax deductions are payments or expenses that reduce your taxable income. There are two classes of deductions: "above the line" deductions are subtracted from gross income, and can only be claimed if you file an itemized statement rather than the standard deduction (which will be explained later).

5. Tax credits can be used to offset one's tax liability. These exchanges occur in a dollar-for-dollar fashion. Frequently, however, you will be required to complete a separate tax sheet for each credit claimed.

You can easily manage your taxes to decrease your yearly federal obligations.