According to the Internal Revenue Service, the biggest claimed value comes from personal exemptions, which in 2005 came to $842 billion.  Most taxpayers, in fact, do claim their exemptions – but there are many other tax perks which may be overlooked.  

1.  Get Educated

If you are within the correct income guidelines, any education-related expenses you paid last year might net you a tax perk or two, including tuition deduction, a Lifetime Learning credit or the Hope credit.

Nearly a quarter of eligible taxpayers did not take advantage of the Lifetime Learning or Hope credits, according to a 2005 US Government report of approximately 1.4 million returns.  On average, each taxpayer only lost about $160, a relatively small amount.  However, one tenth of those taxpayers paid $500 surplus in taxes!

A Lifetime Learning credit can give you as much as $2000 of approved, higher education related expenses for a year.  The Hope credit can net you up to $1650 in tuition and tuition-related fees (not including supplies, books, room or board).  Both credits are income-dependent, and begin to phase out for taxpayers at an income of $47,000 (modified adjusted gross; for married-filing-jointly couples, the figure is $94,000).  The credits disappear completely for taxpayers with a $57,000 MAGI (the married-filing-jointly figure is $114,000).

It is not necessary to itemize in order to receive the fees and tuition deduction, which is worth as much as $4,000.  However, your MAGI must be less than $65,000 if you are a single filer (or $130,000 if you are married-filing-jointly).  Single filers whose MAGI ranges from $65,000 to a maximum $80,000 (for married-filing-jointly couples, $130,000 to $160,00) are only allowed a $2000 deduction; any income higher than this is ineligible for tax deductions. 

Just to make things trickier, you cannot receive the deduction if you take either of the credits.  In general, a credit will be worth more to you than a deduction; however, it is worth checking the figures to make sure which tax perk is the most worthwhile.  Phase-outs, for example, can influence which option is more valuable to you. 

2.  Itemize or standard deduction?

This is one of the most financially significant tax decisions you will make.  For 2007 returns, the standard deduction is $10,700 if married-filing-jointly, $5,350 if single, and $7,850 for the head of a household.

Congress’s investigative arm, the GAO, found in 2002 that only one-third of filing taxpayers choose to itemize.  Approximately $438 on average was lost per taxpayer–$945 million all told-due to not itemizing.

One of the major reasons for not itemizing is the extra time and trouble involved.  Many taxpayers procrastinate and end up losing out.  Instead of hunting for data and records at the last minute, taxpayers should collect them all before hitting the computer.

It is fairly simple for homeowners to judge whether itemizing is worthwhile for them or not.  Add up everything you paid for real estate taxes, mortgage interest, income taxes (state and local), and simply compare the figure against the standard tax deduction.  Be aware, if you are over 65, you can add $1,300 (if filing singly) or $1,050 (if married) to your standard tax deductions.

If you don’t own your own home, don’t write off itemizing.  Renting taxpayers may still be able to claim large medical bills, investment advice fees, trustee fees, charitable donations, investment expenses, state income taxes or even sales taxes.  All these are considered deductible expenses, and might tip the scale, making itemization the smart choice.

For example, as an itemizer you can choose a valuable perk, which may be worthwhile if you live in a state with low or no income tax-deduct your state sales tax in lieu of your state income taxes.

3.  Credit Where Credit’s Due

As a general rule, tax credits are more valuable to you than tax deductions, as they directly reduce your tax payment dollar for dollar.  As well as claiming education credits, remember to claim a child tax credit for every child up to the age of 17.  If you qualify, this can be worth $1,000 per child. 

Parents may also be able to take credits for child care and dependent expenses, including summer day-camp and day-care costs (although not sleepover camp).  This perk could save you up to $2,100 on your tax bill.

If you have invested in a mutual fund overseas or internationally, you may have already paid foreign taxes.  Check your statements to see if you are eligible for a ‘foreign taxes paid’ credit.

Lower-income taxpayers should be aware of the saver’s credit.  This one caps at $1000, and is designed to encourage retirement saving among taxpayers with lower incomes.

4.  Big benefits in Small Business!

Section 179’s expense election can give business owners who have purchased equipment such as trucks, furniture or computers (some limitations apply) as much as $125,000.

Likely the most valuable deduction you will receive, you don’t even have to spend the money to benefit.  If a contractor decides to purchase two new vehicles, financing the majority of the cost, you could purchase one of those vehicles on credit, netting yourself a $60,000 deduction while avoiding spending that amount of money.

Better still, the deduction can reduce the taxable income of your spouse.  If you are a contractor whose wife works at a W-2 job, your depreciation under section 179 can be placed against her W-2 income to offset it, even if it has already been taken to zero. 

An extremely valuable strategy is for people starting up businesses to use their Section 179 exclusion to zap their partner’s income down almost to zero.  This is worthwhile because starting a business is so capital-intensive.

5.  Charitable donations

Many taxpayers fail to utilize the full advantages of charitable tax deduction, which can give you up to half of your adjusted gross income.

Before you begin doing your taxes, collect your receipts and think hard about your charitable giving over the past year, including donated clothes and toys.

Among itemizing taxpayers, charitable contribution deductions are the fourth most valuable deductions.  In 2005, the IRS reported that taxpayers claimed $172 billion in these deductions.

Sadly, the rules have tightened somewhat this year.  Proof in the form of written receipts or bank records is now required from the recipient for cash donations, not of $250 and above like last year, but of any amount at all. 

The IRS states that any donated second-hand items must have been in ‘good’ condition at least.  25% of the price you initially paid for clothing is considered to be thrift shop value, and can be deducted. 

Plan for Next Year

Planning ahead can net you some of the best tax perks around.  Putting money into a retirement account such as a 401K is a great way to save on taxes, by reducing your taxable income.

Another tax perk which can be very valuable is the annual tax exclusion for gifts.  A gift from one person to another up to $12,000 in value is tax-free.  Tax-free gifts from a parent or grandparents can be a tremendous help in our current economic slowdown.

As long as the gift is below $12,000, the recipient does not even need to file a report or gift tax return.

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Calculating adjusted gross income (or AGI) is actually quite simple. Take all the income you report on your taxes, your “gross income,” minus any deductions (called “adjustments”) and what’s left is your adjusted gross income. The following items are all expenses you can legally deduct from your gross income:

Employment Expenses

• One-half of your self-employment tax
• Contributions to qualified retirement, investment and savings plans
• Performing artists’ qualifying expenses
• Educator expenses up to $250
• Rent and royalty expenses

Medical Expenses

• Archer Medical Savings Accounts (MSAs)
• Health Savings Account (HSA) contributions
• Self-employed health insurance

Investment Expenses

• Capital losses up to $3,000.
• Interest forfeited by withdrawing certificates of deposit (CDs) before their maturity date

Business Expenses

• General business expenses
• Domestic production activities deduction
• Net operating losses (NOLs)

Educational Expenses

• Student loan interest up to $2,500
• Tuition and fees up to $4,000
• Travel expenses from attending National Guard or military reserve meetings more than 100 miles from home

Other Expenses

• Jury duty pay turned over to your employer
• Legal fees for illegal discrimination claims
• Moving expenses
• Unemployment benefits repaid because of trade readjustment allowances

Of course, if you are nearly finished or have already filed your tax return, finding your AGI is easy – it’s already on your return! You can find your AGI on line 37 of the 2007 Form 1040, line 21 of the 2007 Form 1040A, or line 4 of 2007 Form 1040EZ.

Some tax benefits are dependent not on your AGI, but on your MAGI, or modified adjusted gross income, which is just your AGI with certain deductions added back in. Unlike your AGI, you may have several MAGIs, depending on which deductions you are required to include in order to receive a benefit. For example, your MAGI for the student loan interest deduction is your AGI added to the amount you deducted for tuition and fees, foreign earned income, and other foreign income and expenses.

Once you calculate your AGI and MAGI, it will be much easier to determine which tax benefits you qualify for. Sometimes your AGI will be too high for you to claim a certain credit. Sometimes it will be too low. But other times, it will be just right!

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Deductions are expenses the IRS allows you to subtract from your taxable income, lowering your overall tax bill. There are two ways to file deductions – using the standard deduction, and “itemizing.”

Standard Deductions

Every taxpayer is allowed to take a standard deduction. The standard deduction assumes you have an “average” amount of tax-deductible expenses, and lumps them into one easy sum based on your circumstances. For 2007, the standard deduction amounts are:

• $850, or all earned income plus $300 (whichever is greater), for dependents (someone who is claimed as a dependent on someone else’s tax return)
• $5,350 for single (unmarried) individuals and those married filing separately
• $7,850 for a head of household (unmarried individual with at least one dependent and currently paying over half the cost of maintaining a home)
• $10,700 for those married filing jointly and qualifying “surviving spouses” (widows and widowers).

In addition to the regular standard deduction, there is an additional standard deduction for those who are 65 or older or blind. For 2007, this additional deduction is $1,300 for unmarried, unwidowed individuals and $1,050 for those who are married or widowed. This additional deduction is added to your regular standard deduction. For example, if you were 68, single, and not blind in 2007, your standard deduction would be $5,350 for being single plus $1,300 for being over 65, for a total of $6,650.

Itemized Deductions

But what if you had more tax-deductible expenses than the standard deduction covers? The other option, in that case, is to list all of your deductions separately. This is called “itemizing,” and can save you hundreds to thousands of dollars more than the standard deduction.

Deductions you can itemize include:

• Charitable donations
• Medical costs
• Interest payments
• Investment losses
• Gambling losses
• Certain legal fees
• Property lost to theft
• Casualty losses
• Expenses for your employer or business that were not reimbursed
• Estate tax payments
• Other taxes

However, if you choose to itemize deductions rather than claim the standard deduction, you are not allowed to claim any additional deductions for being 65 or older or blind.

Difference Between Standard Deduction and Itemized Deductions?

In general, you should claim whichever of the two deduction methods saves you the most money. If your itemized deductions are greater than the standard deduction, you should probably itemize. If the standard deduction is greater, claim the standard deduction.

There are, however, a couple of caveats to this rule. The first is that if a married couple is filing separately and one spouse itemizes deductions, the other spouse must also itemize deductions. Whatever one spouse does, the other must follow suit. So make sure to choose the route that works best for both spouses.

Second, if you are subject to the alternative minimum tax (AMT), you might save more by itemizing rather than taking the standard deduction, even if your itemized deductions are less than the standard deduction. The reason for this is that the standard deduction doesn’t reduce income subject to the AMT, while certain itemized deductions can.

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Here are five simple rules to remember when looking for tax breaks:

1. Don’t lie. If you can’t exempt, defer, or cancel out a certain part of your income, you must pay taxes on it.  Hiding, renaming, or lying about your money is a sure way to get audited, fined, and even arrested in some cases.

2. Obey the spirit as well as the letter of the law. Congress creates doesn’t create tax breaks just to be nice. Sometimes they want to boost the economy, sometimes they want to save the environment – whatever the reason, make sure that it applies to you. Bending tax law to fit your situation can be illegal. If you’re not sure, consult a tax professional.

3. Take tax credits before deductions. Tax credits are better than tax deductions. A tax credit removes a lump sum from your tax bills; deductions reduce your taxable income, so their worth varies according to your tax bracket. For example, say you are in the 30% bracket. A $1000 tax credit directly reduces your tax bill by $1000. A $1000 deduction, on the other hand, would only save you 30% of $1000, or $300.

4. File the right form. Some tax breaks require you to use a certain tax form. You may need to file the “long form,” or 1040, rather one of the simplified forms (1040A or 1040EZ). Be sure to read all the instructions carefully and talk to a tax professional if you have problems.

5. Beware the Alternative Minimum Tax. The alternative minimum tax, or AMT, is often referred to as a “shadow tax system,” because it doesn’t follow the same rules as your regular income tax. The AMT was established to make sure everyone pays a certain minimum tax, no matter how many deductions you qualify for. If your regular tax falls below this minimum, you will have to pay an alternative minimum tax.

You can begin today – find out what tax benefits you qualify for and start taking a ‘break’ from high taxes!

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Predatory Lending

Overall, this predatory lending practice is estimated to cost Americans as a whole about 500 million dollars a year.  Unfortunately poor people tend to be affected the most because they have a greater need to get their money as fast as they can.  Those targeted most tend to be recipients of EITC, the Earned Income Tax Credit.  They recently accounted for 55% or refund anticipation loans. The program, formed in 1975 to help low wage workers is being undermined by tax preparation services that are eating away at these refunds.  Refunds that are being awarded based on the EITC cornerstone that qualifiers for EITC get most of the federal taxes refunded at an attempt to relieve poverty for hard working people.

It seems silly to many of us that someone would pay as much as $218 out of a $760 dollar tax refund to get their money in 1-2 days instead of only 10 days when filing electronically directly with the IRS.  But many of us don’t understand the desperation so many people feel when they are trying to make ends meet on a low income. 

Tax Education 

People need to be educated that they don’t have to be giving up their money in the first place.  Employers will let workers change their W-4 forms to adjust their withholding to more closely match their tax responsibility.  That way, people aren’t paying out their wages in taxes throughout the year unnecessarily in the first place.  People also need to be educated that electronic filing is free for many people now and with direct deposit it only takes about 10 days to get a refund. 

Tax Help

If your financial life is difficult its important to weigh the benefits and drawbacks of getting money fast vs. getting more money by waiting only 8-9 more days.  Free filing is available to those who qualify using the criteria that can be found at www.irs.gov.  Tax help from the Volunteer Income Tax Assistance program is available for people with incomes less than $35,000.  VITA can be reached at 800‑829‑1040 with sites around the country.  Keep what is yours – don’t let H&R Block or Jackson Hewitt keep part of your hard-earned income.  Explore your options and be patient – it might save you a couple hundred dollars or more.

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Mr. Snipes’ defense is that he was “following unscrupulous tax advice”. 

The gist of the bad tax advice is that, apparently, in some tax protestors frantic fascination with saving people from paying taxes, they believe they can leverage some obscure piece of tax code that says people who work in America, for American companies don’t actually have to pay income tax.  Apparently, only those 0.2% of Americans who earn money working for a foreign corporation have to put up with that kind of malarkey.

Hey! Remember Al Capone?  The guy killed people, ran a numbers racket, sold arms to the Iraqi government, and hunted camels in Arizona.  They couldn’t pin a darn thing on him.  Everyone knew he did it, but they still couldn’t make anyhing stick. What finally brought him to serve jail time?  Charges of Tax Evasion!

If you think, for one split second, that you’re going to be the first person to come up with the magical reason why you don’t have to file a tax return, you just might have a decent chance of an insanity plea when you finally get taken to court for tax evasion.

If you find someone giving you that advice.  Run, don’t walk… as far away as possible.  They will be imprisoned, and you will probably be charged along with them.  You don’t want to end up someone’s prison “buddy” just because you could outsmart Uncle Same, do you?

For your amusement, here’s the whole story on the Daywalker’s tax debacle.

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Anyone who files federal or state tax returns in the Commonwealth of Virginia is offered free tax help and tax advice through the Tax Resource Center part of their website: http://www.financialfitness.org/.

The tax questions hotline will be open from January 31st to April 8th.  Unlike the TurboTax folks, they have their answer desk open during the times that people are actually likely to file their taxes.

I wonder what percentage of people actually file their taxes before January 31st.  I mean, most people don’t even get their W-2’s until sometime in February.  So, Virginian’s – someone’s got your back, and they’re not pulling any punches.  Head on over and get yourself some free tax advice.

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