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♂IRS extends tax filing deadline to April 17
♂What You Need to Know for Your 2011 Tax Filing and What*s New for 2012
♂5 Things to Know About the Payroll Tax-Cut Extension
♂IRS announces income tax changes for 2012
♂Some Tax-Law Changes for 2012
♂Tax Law Changes For 2012: What You Need To Know
♂2012 Changes 每 what you need to know
♂Notable 2011 Tax Changes: How they May Impact You
♂2012 Tax Brackets and Standard Deduction (Projected)
♂Take Advantage of These Tax Breaks
♂Top 10 Individual Tax Breaks
♂50 Easily Overlooked Tax Deductions
♂How to adjust your withholding
♂The Most and Least Taxing States to Live and Retire In
♂10 Tax Deductions to Squeeze In Before 2012
♂10 key tax terms to know

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IRS extends tax filing deadline to April 17
By Blake Ellis | CNNMoney.com 每 Wed, Jan 4, 2012 4:07 PM EST

The IRS is giving taxpayers two extra days to get their taxes turned in this year.

While Tax Day typically falls on April 15, the IRS announced Wednesday that it is pushing back this year's filing deadline to Tuesday, April 17.

The extension was granted because April 15 falls on a Sunday this year, and Monday is Emancipation Day, a holiday in Washington D.C. that celebrates the freeing of slaves in the district. Last year, Tax Day was extended until April 18, also thanks to Emancipation Day.

The IRS will also begin accepting returns submitted online through the agency's e-filing system -- which the IRS says is the fastest, most accurate filing option for taxpayers -- on January 17.

If you are requesting an extension, you have until Oct. 15 to file your 2011 tax return, the agency said.

The IRS said it expects to receive more than 144 million individual tax returns this year, with the majority projected to be submitted by the new April 17 deadline.

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What You Need to Know for Your 2011 Tax Filing and What*s New for 2012
By Bonnie Lee | Fox Business 每 Fri, Jan 6, 2012 1:52 PM EST

Tax season is here again! While the filing deadline might be a couple of months away, this month you will receive all required third-party reporting documents: W2s, 1099s for interest and dividends, 1099s for nonemployee compensation if you are an independent contractor, 1099-Bs from your broker reporting proceeds from the sale of stocks and bonds, 1098s from your mortgage holder, K-1s from partnerships, S Corps, estates, and trusts. Hopefully, you*ve set up a file to store all these documents to make data gathering for tax preparation a snap. If not, now*s the time to create one.

Note that the due date for filing this year is April 17. If a tax due date falls on a weekend or a holiday, the next business day becomes the due date. This year April 15 is a Sunday and Monday, April 16 is a federal holiday so the due date falls on Tuesday, April 17. If you are unable to file by the deadline, you may obtain an extension to Oct. 15. Bear in mind that the extension is for filing, not paying. All taxes must be paid by April 17 otherwise you may suffer penalties and interest.

If you pay estimated tax payments throughout the year, the due date for your next quarterly installment for prepayment of 2011 income taxes is Tuesday, Jan. 17. Estimated tax payments for 2012 will be due on April 17, June 15, Sept. 17 and Jan. 15, 2013.

Beginning in 2011, brokerage firms are required to report to the IRS not only proceeds from sales of stocks and mutual funds, but also the cost basis of the investments that are sold. The IRS has designed a new Form 8949 for reporting capital gains and losses. A summary of the information listed on this form is carried over Schedule D. A couple of new columns are added to Form 8949 reporting 每 one for adjustments to basis (in case your broker has an incorrect figure) and one for coding the transaction to identify the type of sale.

Business mileage rates for 2011 were changed mid-year, so when calculating your mileage for 2011 use the rate of 51 cents per mile for miles driven up to June 30, 2011 and 55 ½ cents per mile from July 1 to Dec. 31.

Mileage rates for 2012 are as follows: 55 ½ cents per mile for business, 23 cents per mile for moving and medical, and 14 cents per mile for charitable purposes.

The temporary payroll tax cut has been extended to Feb. 29; employees will enjoy a continued savings of 2% of wages withheld for Social Security 每 from 6.2% to 4.2%. The Social Security wage base for 2012 is $110,100 up from $106,800 in 2011. Once your wages exceed this amount, Social Security will not be withheld but Medicare will continue to be withheld.

The self-employment health insurance deduction no longer offsets the self-employment tax. In 2010 only, self-employed workers were able to reduce the amount subject to self-employment tax on Schedule SE by the amounts paid for health insurance premiums. You can still take the deduction on Form 1040 as an adjustment to income.

Foreign financial assets are reported on a new Form 8938. The foreign asset disclosure form is separate and different from the foreign bank account report. Taxpayers with foreign assets may need to file both documents.

The first-time home buyer*s credit is now only available to members of the military or Foreign Service. If you are repaying the first-time home buyer*s credit, you may not need to complete and attach Form 5405.

Also gone for 2011 is the Making Work Pay Credit. For the past few years we enjoyed $400 per year single and $800 married filing joint credit against our tax liabilities.

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5 Things to Know About the Payroll Tax-Cut Extension
By Barbara Weltman | US News

When Congress agreed to extend the payroll tax cut on December 23, it created an important holiday gift for 160 million workers. Here are five things to help you understand how this tax break applies to you.

1. The extension is temporary. For 2011, workers enjoyed a 2 percentage-point reduction in their Social Security taxes. Instead of paying 6.2 percent on earnings up to the annual wage base ($106,800 in 2011), they paid only 4.2 percent. This rate had been set to run only through the end of 2011, but Congress extended it for two more months. Thus, the rate applies through Feb. 29, 2012, on earnings up to the annual wage base of $110,100 in 2012.

Congress likely will extend the rate reduction for the balance of the year. However, nothing is certain from Washington until a bill is signed into law by the President.

2. The extension also applies to self-employed individuals. The rate cut is not limited to employees. It applies as well to the employee portion of the Social Security tax that is part of self-employment tax, which is paid by self-employed individuals. The tax rate for the employer portion of the self-employment tax remains unchanged.

Self-employed individuals are allowed to deduct the employer portion of the tax as an adjustment to their gross income. Before 2011, they deducted 50 percent of their self-employment tax, which was the employer portion. However, because of the rate reduction that began in 2011, the deduction is more complicated; it reflects the employer portion of the tax, which works out to more than 50 percent of the self-employment tax.

3. The rate reduction is automatic. To enjoy the rate reduction, employees don't have to do a thing. The employer will take it into account in figuring the withholding for Social Security tax.

Because Congress acted so late in the year, many employers and payroll services may not have had time to implement the change at the start of the year. The IRS says that employers should put into effect the new payroll tax rate as soon as possible in 2012, but not later than January 31, 2012. If an employer did not implement the change immediately, then any Social Security tax over-withheld from a paycheck during January will be refunded to the employee. Employers are instructed to make an offsetting adjustment in workers' pay as soon as possible but not later than March 31, 2012.

4. The reduction has no impact on your Social Security benefits. Even though workers are paying less tax into the Social Security system, they do not suffer any reduction in the benefits that will ultimately be collected. The federal government promises to pay the benefit that would otherwise have been received. The benefits are figured on the basis of earnings (up to the wage base limit for the year) and not on the taxes paid.

5. Higher-income earners are subject to a new recapture tax. Those who earn more than 1/6th of the wage base limit in the first two months of 2012, or $18,350 ($110,100 times 1/6) face a new recapture rule when they file their 2012 income tax return in 2013. The 2 percentage-point reduction applies to their actual earnings during the extension period, but any tax on earnings in excess of this amount will be included as an additional income tax on the 2012 return.

For example, say someone earns $12,000 per month ($144,000 for the year). This means that earnings in the two-month period will exceed the $18,350 cap by $5,650 ($24,000 - $18,350). This person must include $113 (2 percent of $5,650) as an additional income tax on the 2012 return.

In conclusion, enjoy your tax savings while you can. If the economy continues to improve, it is unlikely that the payroll cut will be extended beyond 2012. Also remember that there is no reduction in the Medicare tax, which remains at 1.45 percent for employees and 2 percent for self-employed individuals. If you have any questions about how the tax change affects you, consult a tax advisor.

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IRS announces income tax changes for 2012
An increase in 401k contributions and personal exemptions are just two of the many changes scheduled for next year.

Today the IRS announced that several new changes would be in effect for tax year 2012. These changes were made due to inflation and will have an impact on nearly every taxpayer in the country.

Changes for tax year 2012 include:
♂Personal and dependent exemptions will increase by $100 to $3,800
♂Standard deductions have increased in all categories including a $300 increase for married couples filing jointly
♂An increase in tax-bracket thresholds
♂The maximum earned income tax credit will increase to $5,891 from $5,751
♂An increase in the income phase out level for married couples that pay student loan interest

A complete list of all of the changes can be found by visiting the IRS.gov website: In 2012, Many Tax Benefits Increase Due to Inflation Adjustments.
http://www.irs.gov/newsroom/article/0,,id=248485,00.html

The IRS also announced an increase in the contribution limit for certain retirement accounts. In 2012, the new limit will be $17,000 per year, up from $16,500 in 2011. This new limit applies to 401(k)s, 403(b)s, the government*s Thrift Savings Plan and some 457 plans.

Other changes were also made to pension plans including an increase in the phase out range for Roth IRA Contributions. In 2011, married couples filing jointly that made more than $179,000 were not eligible to make Roth IRA contributions. This limit will be increased to $183,000 in 2012.

For more information on the IRS changes to retirement and pension plans, read the release: IRS Announces Pension Plan Limitations for 2012.
http://www.irs.gov/newsroom/article/0,,id=248482,00.html

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Some Tax-Law Changes for 2012
By TOM HERMAN

Happy New Year, and welcome to many tax-law changes that became effective Jan. 1.

Most of the changes stem from annual inflation adjustments that affect income-tax brackets and many other provisions.

These changes apply only to 2012. Thus, they won't affect what you owe for 2011 when you file your return this year.

Here are a few:
♂Federal income tax-bracket thresholds for 2012 have risen for each filing status. For a married couple filing a joint return, the taxable-income threshold separating the 15% bracket from the 25% bracket is $70,700 for this year, up from $69,000 for 2011, according to the Internal Revenue Service.
♂The standard deduction is up slightly. For singles, the basic deduction amount for this year is $5,950, up from $5,800 last year. For married couples, it's $11,900, up from $11,600 in 2011. There are additional amounts for those who are 65 or over, blind or both.
♂The amount of each personal and dependent exemption is $3,800 for 2012, up by $100 from $3,700 for 2011.
♂The maximum amount of the earned income tax credit for low- and moderate-income workers and working families rose to $5,891 for 2012, from $5,751 in 2011. The maximum income limit for the EITC rose to $50,270 from $49,078 in 2011.
♂The foreign earned income exclusion amount rose to $95,100 from $92,900 for 2011.
♂The IRS's optional standard mileage rate for using your car for business will remain unchanged at 55.5 cents this year, the same as in the second half of 2011. This also applies to vans, pickups or panel trucks. Drivers have a choice of using this rate or deducting certain actual expenses. But the rate for using your car for medical or moving purposes is down to 23 cents a mile for this year, from 23.5 cents in the second half of 2011. The rate for using your car to help a charity remains unchanged at 14 cents a mile. This rate is set by Congress.

For more details on the inflation-related adjustments, see IRS Revenue Procedure 2011-52 at www.irs.gov.

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Tax Law Changes For 2012: What You Need To Know

Of course you can*t fully determine your tax liability for next year until you know what your profits and losses will be. But you can get a good idea of what the tax rules will be and how to prepare for them. Reviewing tax law changes and anticipating the various cost-of-living adjustments that you'll have to make will help you plan for 2012. Here's what you should know for tax year 2012.

Taxes on your profits

Most small business owners pay income tax on their share of business profits on their personal returns. Cost-of-living adjustments to federal income tax brackets for individuals mean that you can receive more income without being pushed into a higher tax bracket next year. Various other personal tax rules, including the personal and dependency exemption, the standard deduction and the deductible portion of long-term care insurance, have also been increased due to inflation.

In figuring your profits, you won*t be able to write off as much as you can this year for the purchase of equipment and machinery. Changes include:
♂A decline in the Section 179 first-year expensing deduction to $139,000 (from $500,000 in 2011).
♂A drop in bonus depreciation to 50 percent (down from 100 percent in 2011).

Of course, Congress continues to debate the retention of these and other tax breaks that are incentives for making purchases that help the economy, so the final word on these breaks is still out.

Payroll taxes

You may see an increase in your payroll taxes for 2012. While the tax rates for the Social Security and Medicare portions of FICA will not rise〞they remain at 6.2 percent and 1.45 percent, respectively〞the wage base on which the Social Security portion is figured will rise. The Social Security Administration announced a 3.6 percent increase to the wage base, setting it at $110,100 for 2012; it had been $106,800 since 2009. This amounts to about a $200 increase per employee at or above the wage base.

The FUTA tax rate remains at 6.0 percent, a decline that took effect on July 1, 2011. However, Congress is considering adding back the 0.2 percent surtax that had expired. This surtax was in place since 1976 and likely will be viewed as a benign revenue raiser if funds are needed to offset new tax breaks enacted as part of a jobs bill or other stimulus package.

If you are self-employed, the same Social Security wage base also applies for self-employment tax purposes. Thus, in 2012 the self-employment tax to cover your Social Security and Medicare tax obligation will rise about $400, one half of which will be deductible.

Benefits for employees

Most of the breaks that you currently provide to employees on a tax-advantaged basis will continue to apply for 2012. However, some may increase due to COLAs, while others may decrease because of law changes that take effect next year.

Contributions to qualified retirement plans. Companies will be able to contribute on a tax-deductible basis up to $50,000 to profit-sharing plans and SEPs in 2012; the limit for the past several years has been $49,000. Benefits under defined benefit (pension plans) will be permissible up to $200,000 (up from $195,000 in 2011).

Transportation assistance. If you provide certain transportation fringe benefits, changes are afoot. The limit on the value for monthly free parking will rise to $240 (up from $230), while the limit on monthly transit passes and vanpooling will drop to $125 (down from $230). Bicycling assistance will stay at $20 per month.

Adoption assistance. Companies that pay for or reimburse employee adoption costs will be limited to $12,650 (down from $13,360 in 2011).

The bottom line

Meet now with your tax adviser to review coming changes. This will enable you to do year-end planning to save on this year*s tax bill, as well as budget more accurately for the coming year.

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2012 Changes 每 what you need to know
Justine Davies

Firstly, a Happy New Year to each and every one of you! As a parent, each single year is momentous as our babies develop into toddlers and then into children, reaching new milestones along the way. Is this the year they learn to walk? That they start childcare or kindy or school? Will they welcome a new sibling into the family? Whatever the developments for your family this year, the one guarantee is that there will be change.

And of course there is constant change in just about every other area as well, including government policy and benefits. The main changes that may affect you as a parent this year include:

♂Start of the National Quality Framework. If your young ones attend childcare, then it*s worth knowing that the 1st January 2012 marks the start of the first national framework for Childcare. It is a $273 million investment over eight years, which will see the various state and territory systems merge into one national regulatory body. Ideally it will reduce duplication inefficiencies and create a streamlined national experience for pre-schoolers. It is also likely to raise the cost of childcare gradually over the next few years.

In terms of right here and now, the main change that parents in some states may notice is the change in educator to child ratio in the birth to two-year age group, which is being set at 1:4 (in South Australia, Tasmania, the Northern Territory and the ACT that ratio is currently 1:5). There are changes for other age groups slated to commence in 2014 and 2016. You can find out more information on the Australian Children*s Education and Care Quality Authority (ACECQA) website.

♂Increase of FTB (A) amount for some teenagers. Also on 1st January the Family Tax Benefit Part A (FTB A) will increase for eligible families with dependent 16 to 19 year olds who are undertaking full-time secondary study. The maximum rate will increase by a substantial $161.42 per child per fortnight. The benefit is means tested and your child must be studying full time in order for you to be eligible. This benefit will replace the Youth Allowance for some families. You can find out more on the government*s family assistance website.

♂Easier comparison of mortgages. While it isn*t specifically a parenting issue, finding and applying for a mortgage that suits your needs is certainly a huge issue for countless families. And the process is now a little bit easier, with the government requiring lenders to give customers a key fact sheet on home loans, if you ask for one. The fact sheet will make it easy for you to compare interest rates, costs and benefits of loans.

♂Changes to the immunization allowance. From July 2012, the non-means tested Maternity Immunization Allowance will cease to exist. Instead, families will need to meet immunization requirements to receive the Family Tax Benefit (A) Supplement 每 currently an amount of $726 for the financial years that each child turns one, two and five years of age.

♂Reduction of the baby bonus. If you are considering adding to your family, then you may be impacted by the reduction in the Baby Bonus, which in September will be reduced by $400, from $5,400 to $5,000. The bonus will then be frozen at that level for a further three years.

Of course, these are just the changes that we currently know about 每 there could well be a whole new set of changes in the federal budget, in May. It*s really quite unpredictable. A bit like parenting, really #!

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Notable 2011 Tax Changes: How they May Impact You

It*s difficult to keep up with all of the tax changes that take place from year to year. 2011 was intended to be the year when many of the Bush tax cuts would expire and subsequently cause tax rates to increase. However, thanks to the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, many of the tax deductions and credits that were set to expire in 2011 were either extended or modified. Please keep in mind that although most of these changes are favorable, they are set to expire after 2011 or 2012.

Summary of Some of the 2011 Tax Changes:

2011 Tax Brackets: The rates carry over from last year, but the tax brackets have been increased slightly for inflation. These rates will remain in effect through the end of 2012.

2011 Tax Brackets Single Married Filing Jointly
10% Bracket $0 每 $8,500 $0 每 $17,000
15% Bracket $8,500 每 $34,500 $17,000 每 $69,000
25% Bracket $34,500 每 $83,600 $69,000 每 $139,500
28% Bracket $83,600 每 $174,400 $139,500 每 $212,300
33% Bracket $174,400 每 $379,150 $212,300 每 $379,150
35% Bracket $379,150+ $379,150+

Taxes on Investments

Both dividends and long-term capital gains have stayed at the low rates that were originally supposed to end in 2010. The rate is zero for taxpayers who fall within the 15 percent or lower tax bracket, while taxpayers in the 25 percent or higher tax bracket pay the 15 percent rate. These rates are in effect through the end of 2012. After 2012, the capital gains rate will go up to 20 percent and the dividend tax rate will become the same as ordinary income tax rates.

Estate Taxes & Gift Taxes

If you have assets that you would like to give to friends or family, the current estate and gift tax system is not as favorable as it was in 2010. For 2011, there is a top rate of 35 percent with a single exemption of $5 million per person ($10 million per couple), per estate. Giving tax-free gifts is still capped at $13,000 per recipient per year 每 so as the gift giver, you can make an unlimited amount of $13,000 in gifts to different individuals. For 2012, the top rate stays the same with the exemption amount indexed for inflation.

Roth IRA Changes

This year, you can convert your traditional IRA to a Roth IRA, regardless of your income. Last year, individuals who converted could defer conversion income into later years, but conversions taking place in 2011 do not have this option.

1 Year Temporary Payroll Tax Reduction

Last year, the Social Security payroll taxes were cut by 2 percent, up to $2,136 per worker (whether filing married or single). This remains in effect through the end of 2011. Most employees already receive this tax cut out of their automatic tax withholding. Self employed individuals will experience the payroll tax reduction in the form of a drop from 12.4 percent to 10.4 percent and will be included on the quarterly withholding worksheet. Lower income individuals may not see a payroll tax cut at all, but instead a tax increase by the sheer fact that the Making Work Pay Tax Credit, which offered more savings for single workers making $20,000 or less (or married couples making $40,000 or less,) expired in 2011.

Alternative Minimum Tax Patch

The AMT exemption rates are higher than 2010, but remain in effect through the end of 2011. Single filers qualify with income levels of $48,450 or lower, while married couples qualify with income levels at $74,450 or lower. Furthermore, nonrefundable credits can still be used against the AMT.

Some Extensions of Important Tax Credits

The modified child tax credit, the increased Adoption Tax Credit, the credit to employers for child care assistance, the 3rd Child Earned Income Tax Credit (EITC), and the Dependent Care Tax Credit have all been extended through 2012.

Homeowner Energy Tax Credits

The energy tax credit 每 which allows credit for energy efficient home improvements 每 has been extended but is useful to fewer taxpayers than it was in the past. The credit is now set at a maximum of $500 per tax payer for a lifetime, which means that anyone who received the $1,500 tax credit last year will not qualify. The homeowner energy tax credit will be available through the end of 2011.

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The Bureau of Labor Statistics recently released the CPI-U figure for August of this year, thereby providing the last piece of information needed for the calculation of the 2012 tax brackets.

The reason the August inflation figure is the last piece needed to calculate next year*s tax brackets is that, according to the internal revenue code, for purposes of calculating tax brackets:

※The cost-of-living adjustment for any calendar year is the percentage (if any) by which the CPI for the preceding calendar year, exceeds the CPI for the calendar year 1992. [...] The CPI for any calendar year is the average of the Consumer Price Index as of the close of the 12-month period ending on August 31 of such calendar year.§

So, in short, to calculate a given year*s tax brackets, you take the 1992 tax brackets, adjust the tax rates based on the Jobs and Growth Tax Relief Reconciliation Act of 2003, then adjust the applicable income levels upward in keeping with inflation.

If the upper income limit for any tax bracket determined in the above manner is not a multiple of $50, it*s rounded down to the nearest multiple of $50 〞 with the exception of married filing separately tax brackets, for which you round down to the nearest multiple of $25.

As it turns out, the September 2010 每 August 2011 average CPI-U was 2.43% higher than the September 2009 每 August 2010 average CPI-U. And that leaves us with the following tax brackets. (Thanks to the Tax Foundation for doing the math, and to their analyst Nick Kasprak for explaining it to me!)

A quick reminder before we get to the tax bracket tables: Being in a given tax bracket does not mean that all of your income will be taxed at that rate. Rather, only the portion of your income that is in that bracket will taxed at that rate. (See this article for a more complete explanation.)

Single 2012 Projected Tax Brackets
Taxable Income Marginal Tax Rate:
$0-$8,700 10%
$8,701-$35,350 15%
$35,351-$85,650 25%
$85,651-$178,650 28%
$178,651-$388,350 33%
$388,351+ 35%

Married Filing Jointly 2012 Projected Tax Brackets
Taxable Income Marginal Tax Rate:
$0-$17,400 10%
$17,401-$70,700 15%
$70,701-$142,700 25%
$142,701-$217,450 28%
$217,451-$388,350 33%
$388,351+ 35%

Head of Household 2012 Projected Tax Brackets
Taxable Income Marginal Tax Rate:
$0-$12,400 10%
$12,401-$47,350 15%
$47,351-$122,300 25%
$122,301-$198,050 28%
$198,051-$388,350 33%
$388,351+ 35%

Married Filing Separately 2012 Projected Tax Brackets
Taxable Income Marginal Tax Rate:
$0-$8,700 10%
$8,701-$35,350 15%
$35,351-$71,350 25%
$71,351-$108,725 28%
$108,726-$194,175 33%
$194,176+ 35%
Projected 2012 Standard Deduction and Exemption

The standard deduction and personal exemptions are calculated similarly (that is, using annual inflation figures from September-August) but with different base years (1987 for the standard deduction and 1988 for exemptions).

For 2012 the projected personal exemption is $3,800, and the projected standard deductions are:
♂$5,950 for single taxpayers and married taxpayers filing separately,
♂$11,900 for married taxpayers filing jointly, and
♂$8,700 for taxpayers filing as head of household.

The additional standard deduction for taxpayers who are blind or over age 65 is projected to remain unchanged at $1,450 for single taxpayers and $1,150 for married taxpayers.

Important caveat: Everything above is subject to change. Should any new tax legislation be passed before the end of this year (or passed in 2012 and made effective for that year), this information could turn out to be entirely incorrect.

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By Courtney Rubin | US News 每 Fri, Dec 16, 2011 3:47 PM EST

No one can predict the market, and with taxes on the table, it's tough to know what next year will bring on that front, too. But a number of money-saving opportunities exist through 2012; here are five ways you might profit from today's IRS rules and rates:

1. If you have a sizable estate, this is a good time to give some of it away while you're still alive. The current estate and gift tax exemptions and rates are the most generous in many decades, says tax historian Joseph Thorndike. As recently as 2010, though no estate tax applied for that year, the gift tax exemption limited you to handing off $1 million free and clear. (If that sounds like more than you can imagine passing along, keep in mind that many people would hit it quickly, counting the value of their real estate.) But at least for 2011 and 2012, each person can give away $5 million without paying a penny in taxes--which makes now an advantageous time to set up a trust for your grandchildren, say, or to hand over part of a closely held business. "We don't know what the law will be like in 2013," says Mark Nash, a Dallas-based partner in the personal financial services practice of Price-waterhouseCoopers. "But it's unlikely it will be this generous."

2. People making money from a hobby may benefit by starting to run it as a business before the end of this year. As of last January, anyone who sells something is subject to a new kind of reporting by the companies handling the transactions. If you have more than 200 transactions totaling over $20,000 per year on eBay or on MasterCard or Visa from peddling your wares at craft fairs, say, you (and the IRS) will get a 1099-K showing your take. Handling it as a business rather than a hobby will allow you more generous deductions, says Eva Rosenberg, a tax expert who answers questions and offers professional education at www.taxmama.com. For example, expense deductions from a hobby are limited to the amount of income it brings in and reduced by 2 percent of your adjusted gross income, no matter how much you actually spent. One easy way to establish that you're truly in it for money: Write up a business plan.

3. Take some deductions early. There's a lot of talk about capping the generosity of itemized deductions as a way to raise more revenue. Those in a high tax bracket may want to prepay real estate taxes and state income taxes so as to nab the greatest benefit while it's still available. This strategy also applies to other expenses you can accelerate: the points you pay upfront to refinance a mortgage or buy a house, for example, and unreimbursed professional dues.

4. Take advantage of the zero percent capital gains tax available through 2012 to low-bracket taxpayers; for this year, that means single taxpayers with taxable income of no more than $34,500 and joint filers with up to $69,000. Retirees who come in under these income limits may want to bump up against the ceiling by realizing some of their investment gains in 2012 rather than in 2013, says Kay Bell, who writes the popular "Don't Mess With Taxes" blog. For people in higher brackets whose stocks have appreciated significantly and who are interested in giving money to adult children or elderly parents, Rosenberg suggests thinking about giving them shares if they're in the right income range. They just can't be your dependents; if the capital gains were realized by a dependent college student, for example, they'd be taxed at your rate. "This is something that costs you little and could cost them nothing," she says.

5. Anyone who has sold a business, a building, or some other asset by setting up an installment agreement with the buyer might benefit by urging him or her to refinance and pay up completely as soon as possible. "I'm sure this 15 percent capital gains tax will end in 2012. You don't need a crystal ball to see that," says Rosenberg, who expects a dramatic increase by 2013.

The move shouldn't be a tough sell to make to your buyer, she says, because interest rates worldwide are low and will almost certainly go up. If you need to sweeten the deal, she suggests offering to pay some of the refinancing fees. "It will reduce your profit, but you're still going to save a lot of money in the long run."

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Top 10 Individual Tax Breaks
By Philip Moeller

A $1 Trillion Question

Here are the 10 biggest tax breaks for individuals, according to the U.S. Office of Management and Budget. The amounts are calculated for the government*s 2012-2016 fiscal years. Completely eliminating a tax break would not lead to government revenues rising by the exact amount of the tax break. Instead, the idea is that individuals would change their behaviors, and thus alter the level of revenue increases.

1ㄝExclusion of employer contributions for medical insurance premiums and medical care

Employer-paid health insurance premiums and other medical expenses (including long-term care) are deducted as a business expense by employers, but they are not included in employee gross income.

Revenue loss fiscal years 2012-2016: $1,071.2 billion

2ㄝDeductibility of mortgage interest on owner-occupied homes

The mortgage interest deduction is limited to interest on debt no greater than the owner*s basis in the residence, and is also limited to interest on debt of no more than $1 million. Interest on up to $100,000 of other debt secured by a lien on a principal or second residence is also deductible.

Revenue loss fiscal years 2012-2016: $609.2 billion

3ㄝStep-up basis of capital gains at death

Capital gains on assets held at the owner*s death are not subject to capital gains tax under current law. The cost basis of the appreciated assets is adjusted to the market value at the owner*s date of death.

Revenue loss fiscal years 2012-2016: $357.1 billion

4ㄝ401(k) plans

Individual taxpayers can make tax-preferred contributions to certain types of employer-provided 401(k) plans (and 401(k)-type plans, like 403(b) plans and the Federal Government*s Thrift Savings Plan). The tax on contributions and the investment income earned by 401(k)-type plans is deferred until withdrawn.

Revenue loss fiscal years 2012-2016: $356.3 billion

5ㄝExclusion of net imputed rental income

Homeowners, of course, don*t have to pay themselves rent. But there is still an implied rental income benefit of ownership, and it normally would be considered taxable income. The current law allows an exclusion from taxable income for the implicit gross rental income on housing services.

Revenue loss fiscal years 2012-2016: $302.8 billion

6ㄝDeductibility of nonbusiness state and local taxes other than on owner-occupied homes

Taxpayers who itemize their deductions may claim a deduction for state and local income taxes (or at the taxpayer*s election, state and local sales taxes) and property taxes, even though these taxes primarily pay for services that, if purchased directly by taxpayers, would not be deductible.

Revenue loss fiscal years 2012-2016: $292.3 billion

7ㄝEmployer pension plans

Certain employer contributions to pension plans are excluded from an employee*s gross income even though the employer can deduct the contributions. In addition, the tax on the investment income earned by pension plans is deferred until the money is withdrawn.

Revenue loss fiscal years 2012-2016: $246 billion

8ㄝDeductibility of charitable contributions, other than education and health

In addition to permitting the deduction of cash contributions, taxpayers who donate capital assets to charitable organizations can deduct the assets* current value without being taxed on any appreciation in value.

Revenue loss fiscal years 2012-2016: $240.5 billion

9ㄝCapital gains exclusion on home sales

A homeowner can exclude from tax up to $500,000 ($250,000 for singles) of the capital gains from the sale of a principal residence. The exclusion may not be used more than once every two years.

Revenue loss fiscal years 2012-2016: $216.8 billion

10ㄝAccelerated depreciation of machinery and equipment

Permits owners to elect tax deductions for eligible machinery and equipment expenses at an accelerated rate in excess of the rate used over the normal useful life of the assets.

Revenue loss fiscal years 2012-2016: $160.2 billion

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50 Easily Overlooked Tax Deductions
edited by Peter W. Bernstein

Summary: Save money on your taxes by making yourself aware of these 50 easily overlooked tax deductions. This is an excerpt from THE ERNST & YOUNG TAX GUIDE 2000, edited by Peter W. Bernstein. Published by John Wiley & Sons, Inc. Reprinted here with permission.

The inevitable tax season is upon us once again. But it doesn't have to feel like a post-holiday hangover. There are a lot of things you can do to make your filing process easier, and your refunds larger! The excerpt below, taken from the introductory pages of the ERNST & YOUNG TAX GUIDE 2000, lists 50 deductions that one might overlook when itemizing. More about the guide follows the excerpt.

EXCERPT -50 OF THE MOST EASILY OVERLOOKED DEDUCTIONS

The following list will serve as a reminder of some deductions you can easily overlook when you prepare your return. It is not intended to be all-inclusive, nor applicable to everyone. The circumstances of your situation will determine whether you qualify.

1. Accounting fees for tax preparation services and IRS audits

2. Alcoholism and drug abuse treatment

3. Amortization of premium on taxable bonds

4. Appraisal fees for charitable donations or casualty losses

5. Appreciation on property donated to a charity

6. Casualty or theft losses

7. Cellular telephones

8. Cleaning and laundering services when traveling

9. Commissions and closing costs on sale of property

10. Contact lenses, eye glasses, and hearing devices

11. Contraceptives, if bought with a prescription

12. Costs associated with looking for a new job in your present occupation, including fees for resume preparation and employment of outplacement agencies

13. Depreciation of home computers

14. Dues to labor unions

15. Education expenses to the extent required by law or your employer or needed to maintain or improve your skills

16. Employee contributions to a state disability fund

17. Employee's moving expenses

18. Federal estate on income with respect to a descendent

19. Fees for a safe-deposit box to hold investments

20 Fees paid for childbirth preparation classes if instruction relates to obstetrical care

21. Foreign taxes paid

22. Foster child care expenditures

23. Gambling losses to the extent of gambling gains

24. Hospital services fees (laboratory work, therapy, nursing services, and surgery)

25. Impairment-related work expenses for a disabled individual

26. Improvements to your home

27. Investment advisory fees

28. IRA trustee's administrative fees billed separately

29. Lead paint removal

30. Legal abortion expenses

31. Legal fees incurred in connection with obtaining or collecting alimony

32. Margin account interest expense

33. Medical transportation, including standard mileage deduction and lodging expenses incurred for medical reasons while away from home

34. Mortgage prepayment penalties and late fees

35. Out-of-pocket expenses relating to charitable activities, including the standard mileage deduction

36. Part of health insurance premiums if self-employed

37. Penalty on early withdrawal of savings

38. Personal liability insurance for wrongful acts as an employee

39. Points on a home mortgage and certain refinancings

40. Protective clothing required at work

41. Real estate taxes associated with the purchase or sale of property

42. 50% of self-employment tax

43. Seller-paid points on the purchase of a home

44. Special equipment for the disabled

45. Special schools and separately stated feed for medical care included in tuition

46. State personal property taxes on cars and boats

47. Subscriptions to professional journals

48. Theft of embezzlement losses

49. Trade or business tools with life of 1 year or less

50. Worthless stock or securities

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How to adjust your withholding
By Kay Bell | Bankrate.com

Most Americans pay the bulk of their annual tax bills via payroll withholding. Through this process, a percentage of your pay is taken out each pay period and sent to the Internal Revenue Service where it is credited toward your final tax bill.
Payroll pitfalls

Payroll withholding is something you want to get just right. Why?

If you have too little taken out, you'll owe money when you file your return. That's not good, obviously -- no one likes to write out a big check to Uncle Sam.

If too much is withheld, you'll get a refund, and that's not good either. What's wrong with getting a refund? That means you've given Uncle Sam free use of your tax money, which you could have made better use of yourself throughout the year.

The best course, tax experts say, is to adjust your withholding so your tax payments will match your actual tax liability. To Uncle Sam, you will be neither a borrower nor a lender.

To make the change, file a new W-4 with your employer. This will change the amount that comes out of your paycheck.

You should do this any time there's a major change in your life -- such as marriage, birth of a child or purchase of a home. Each of these circumstances can affect the amount of tax you'll eventually owe. The IRS offers an interactive withholding allowance calculator and a couple of work sheets on page two of Form W-4 to help you figure out just what changes you need to make to your withholding amount.

If you find the IRS language a bit dense, Bankrate explains it in "Understanding the W-4."
The paycheck effect

Those who usually write a big check to the IRS may have to deal with a slight cut in take-home pay so that it doesn't happen again. You can decrease the number of personal allowances on the W-4 form or simply ask that a set amount be taken from your paycheck each period.

To figure out how much, take the amount you paid to the IRS and divide it by the number of pay periods remaining in the current year. No one likes to see a paycheck shrink, but it will make next April much less painful.

If you regularly get a big refund, increase the number of personal allowances. Once you get the correct amount taken out and have a bit more cash each paycheck, don't automatically spend it. Because you're no longer a customer of the Unofficial Bank of the IRS, open an account -- savings, money market or certificate of deposit -- at an institution where your money will earn you, not the federal government, interest.

Bankrate's search pages can help you find the best rates on money market accounts or certificates of deposit.

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The Most and Least Taxing States to Live and Retire In
By Joel Stonington | Bloomberg 每 Tue, Nov 29, 2011 10:11 AM EST

States facing shrinking revenues approved $23.9 billion in new taxes and fees in 2010. They imposed a further $6.2 billion in taxes in 2011 and proposed $13.8 billion in new taxes for 2012, according to the National Association of State Budget Officers. "Many jurisdictions, many states, many counties, are broke," said Carol Kokinis-Graves, senior writer analyst at Riverwoods (Ill.)-based tax and accounting firm CCH, a Wolters Kluwer business. Along with cutting services, states are getting creative in finding additional revenues. (Think: taxes on yoga classes and lots more "sin" taxes.)

The Tax Foundation annually releases state-local tax burdens for the residents of each state. The burdens are effective tax rates calculated by totaling state-local level taxes paid by taxpayers in each state, then dividing by their income. The burdens also reflect the economic incidence of taxes that are commonly shifted to out-of-state taxpayers.

Does your state lead the pack in levying taxes on income, property, consumption, inheritance, and whatever else it can dream up? Read on to see which states make you pay the most 〞 and the least.

5 Highest State Tax Burdens

1. Connecticut
Income tax: 5%
Sales tax: 6.35%
Property tax per capita: $2,381
Inheritance tax: 7.2% to 16% with $2 million exemption

High taxes in Connecticut are paired with the nation's highest income per capita--$56,001 per person in 2010, according to the Bureau of Economic Analysis. A sales tax increase took effect in July, raising the rate, from 6 percent to 6.35 percent, and adding a further 3 percentage-point levy on luxury goods such as expensive cars and boats. The state collects the third-highest property taxes per capita and is one of 14 states to tax Social Security income, according to CCH.

2. New Jersey
Income tax: 6.37%
Sales tax: 7%
Property tax per capita: $2,625
Inheritance tax: See note*

Regularly listed as a state with one of the highest tax burdens, New Jersey is cited by the Tax Foundation as having the country's highest property tax per capita. All Social Security benefits in New Jersey are excluded from gross income.

* Transfer to a spouse, lineal descendant, or charitable organization is tax-free; transfer to children-in-law is taxed at 11 percent to 16 percent; all other transfers are taxed at 15 percent to 16 percent.

3. New York
Income tax: 7.85% (8.97% on income over $500,001)
Sales tax: 4%
Property tax per capita: $2,009
Inheritance tax: Estate taxes range from 0.8% to 16%

The high taxes paid by New Yorkers aren't helping to offset a big decline in revenue amid recession. An oft-suggested, ever-controversial stock transfer tax seems to be off the table. A smoke break to think about how much New York would make whenever a share changes hands is not recommended because the state has the country's highest cigarette tax, at $4.35 a pack.

4. Massachusetts
Income tax: 5.3% (flat tax rate)
Sales tax: 6.25%
Property tax per capita: $1,789
Inheritance tax: Estate taxes range from 0.8% to 16%

Even though Massachusetts residents are saddled with the highest amount of debt per person in the U.S.--$11,357 apiece in 2009, according to the Tax Foundation--it seems likely that the state income tax rate will be reduced this year. Voters moved to reduce it to 5 percent years ago but the change has been blocked by lawmakers. With a $2 billion increase in tax revenue due to a strengthening economy--$723 million over the projected take--the tax rate will likely go from 5.3 percent to 5.25 percent, according to MassLive.

5. Maryland
Income tax: 5.5%
Sales tax: 6%
Property tax per capita: $1,171
Inheritance tax: See note*

Sales tax increases are in the cards for Maryland residents. In 2010, income tax brought in $6.2 billion, compared to $3.8 billion in sales tax. With a budget deficit of more than $1 billion looming, lawmakers are looking at tax increases on gasoline, medicine, online shopping, and snacks. A proposed increase in the sales tax on alcohol, from 6 percent to 9 percent, is expected to add $84.8 million to Maryland's 2012 revenue.

* Spouse and linear-descendant and sibling transfer is tax-free; all other transfers are taxed at 10 percent.

5 Lowest State Tax Burdens

1. Mississippi
Income tax: 5%
Sales tax: 7%
Property tax per capita: $785
Inheritance tax: None

Savers will be gratified to find that recent rule changes in Mississippi exempt all IRAs from income tax. The change makes Mississippi one of four states to allow citizens to contribute to retirement accounts without paying state income tax on the money. Mississippi has no inheritance or estate tax.

2. South Carolina
Income tax: 7%
Sales tax: 6%
Property tax per capita: $963
Inheritance tax: None

South Carolina had the least tax collections per person in 2009 (the most recent year available), according to the Tax Foundation. including corporate taxes. If you are looking to get married, the state has a $50 tax credit for prior counseling.

3. Tennessee
Income tax: None
Sales tax: 7%
Property tax per capita: $752
Inheritance tax: See note*

Tennessee does not tax income, apart from a 6 percent levy on interest and dividends. Capital gains are exempt. Still, investors should be aware that the state inheritance tax allows tax-free transfer only to a spouse.

* Transfer to a spouse is tax-free; all other transfers are taxed at 5.5 percent to 9.5 percent.

4. Alabama
Income tax: 5%*
Sales tax: 4%*
Property tax per capita: $495**
Inheritance tax: None*

With low state debt, Alabama ranks among the states with the lowest taxes collected per capita--$1,770 per person in 2009, according to U.S. Census data and the Tax Foundation. It also has the lowest state and local property tax collections per person. At least one obsolete tax law remains on the books--Alabama's tax for the neediest Confederate veterans from the Civil War. The tax now supports the 102-acre Confederate Memorial Park, built on the site of the Old Soldiers Home for Confederate Veterans and complete with a museum (left), according to an article by the Associated Press.

* Income (highest bracket available), sales, and inheritance tax information were provided by CCH, a Wolters Kluwer business.

** Property tax statistics are derived from a Tax Foundation analysis of 2008 U.S. Census Bureau data.

5. Alaska
Income tax: None
Sales tax: None
Property tax per capita: $1,559
Inheritance tax: None

Alaska gets significant income from corporate taxes, mostly from the oil-and-gas industry. The state collects high revenue per person--$7,145 in 2009, according to the Tax Foundation--without collecting income, sales, or inheritance tax. Local investors don't pay state tax on capital gains because there is no income tax. However, at $1,559 per person, property taxes are relatively high.

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10 Tax Deductions to Squeeze In Before 2012
MainStreet 每 Fri, Dec 9, 2011 4:50 PM EST

The end of the 2011 is just around the corner, but there*s still time to save on your taxes. I have compiled a list of payments you can make this December to increase your 2011 tax refund or reduce your 2011 federal, and perhaps state, income tax liability.

A few things to keep in mind: You can use a bank credit card to buy deductible items in December and be able to deduct them on Schedule A. Also, the first seven items apply only if you will be itemizing deductions for 2011, so make sure you will be able to itemize before making any payments.

Cram in Medical Appointments

Time to cram in those trips to the doctor. The Internal Revenue Service lets you deduct your yearly medical costs as long as they exceed 7.5% of your 2011 adjustable gross income 每 a high percentage, but one you can meet by refilling your prescriptions, scheduling check-ups, eye exams and doctor visits, stocking up on deductible medical supplies and paying any outstanding medical bills this December. Also, don*t forget to keep track of your round-trip mileage when driving to medical appointments.

Do you make direct monthly payments of health insurance premiums, or is your long-term care insurance up for renewal next month? A good tip is to make the January payment in December.

Make a State/Local Income Tax Payment Early

Are you making quarterly state estimated tax payments, deducting state and local income tax and not state and local sales tax? If so, make the fourth-quarter payment that is due Jan. 16 in December.

If you expect to have a balance due on your 2011 state income tax return, you can ask your employer to increase your state income tax withholding.

If you make the decision to deduct state and local sales tax instead of state and local income tax, or if your state does not have an income tax and you were planning to buy a new car, truck or motorcycle in early 2012, make the purchase in December. In fact, you may actually save money on a year-end deal.

Many taxpayers do as I recommend and save all of their sales tax receipts during the year to see if it would be worthwhile to deduct actual state and local sales tax instead of using the Optional State and Local Sales Tax Table. If you will be deducting state and local sales tax, and the total tax from your accumulated bills will exceed the amount allowed in the table (you can use the Sales Tax Calculator tool on the IRS Web site), buy big-ticket items that are scheduled for purchase in early 2012 before the end of December.

Pay Real Estate Taxes Early

In some states, real estate taxes are billed once a year, with perhaps separate billings for municipal, county and school taxes. In others, inlcuding my home state of New Jersey, the taxes are combined but you are billed quarterly.

Make payments due early in 2012 before the end of December. In New Jersey, the first-quarter payment for the year is due Feb. 1, so I tell clients to send their check before Christmas.

Pay Mortgage Interest Early

In most cases your monthly mortgage and/or home equity loan payments are due during the first week of the month. Make the January payment(s) before the end of the month and make sure the bank or mortgage company gets the payment in December so the additional interest payment will be reflected on your 2011 Form 1098.

Make Some Charitable Contributions

Doing good can be good for your wallet, too, since you can write off your charitable contributions. Add your favorite church and charities to your Christmas gift list and donate used clothes, books and household items to the Salvation Army, Goodwill or a similar organization. Just be sure you make a list of the items you are donating and get a receipt from each organization you give to.

Don*t have the cash available to make the contribution? You can donate stock or mutual fund shares that have appreciated in value to a church and charity and claim a deduction for the fair market value of the investment on the date of the contribution. Keep in mind that you don*t have to report the capital gain as income on your tax return, and be sure not to contribute an investment that is worth less than when you paid for it.

Buy Some Work Essentials

Business owners aren*t the only ones who can deduct work-related expenses 每 employees can, too, if the expenses exceed more than 2% of their adjusted gross income.Buy uniforms (or have your existing uniforms dry-cleaned) and deductible work clothes, small tools and supplies now; attend a work-related conference, seminar or workshop; and renew subscriptions to job-related and investment publications that will expire early next year. If your annual safe-deposit box fee is due in January, pay it in December. Also, if you use tax software to prepare your returns (not that I recommend doing this), buy the updated package before year-end.

Prepay 2012 College Tuition and Fees

If you*re paying for college tuition for yourself, your spouse or your dependent child, you may be eligible for a tax credit or deduction. Such expenses qualify in the year actually paid, and you can use payments made in 2011 for education that will begin during the first three months of 2012 to determine the amount of the deduction or credit.

If you have not made enough qualified payments in 2011 to claim the maximum deduction or credit allowed for your level of income, you can send the college a check for the first semester of 2012 in December.

Make Your Home More Efficient

Have you taken steps to make your home green? If so, this credit is for you. The IRS considers qualified energy-efficiency improvements to be insulation, energy-efficient exterior windows and doors and certain roofs, though the cost of installing these items does not count and the deduction for windows is limited to $200. The credit also applies to the cost, including installation, of residential energy property such as high-efficiency heating and air conditioning systems.

If you haven*t already claimed at least $500 in energy tax credits on prior years* tax returns, you can claim a credit of 10% of the cost of qualified energy-efficient purchases and improvements to your principal personal residence. The maximum credit is $500.

Also important: When buying, be sure to get a ※Manufacturer*s Certification§ from the seller.

Make Needed Repairs to Income Properties

If you own rental real estate, such as a two-family home or vacation property, make needed repairs, buy supplies and make payments for the property this month and fill up the oil tank before year-end. You can also prepay real estate taxes, utility bills, insurance premiums and any January 2012 mortgage payment.

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10 key tax terms to know
By Kay Bell | Bankrate.com

One of the hardest things about taxes is learning the language. You've got all the forms and instructions, but it seems they're harder to decipher than that first lesson in your high school Latin class. Here are 10 key tax terms to help you start talking taxes.

♂AGI.
♂Tax credits.
♂Tax deductions.
♂Standard deduction.
♂Itemized deductions.
♂Tax exemption.
♂Progressive taxation.
♂Taxable income.
♂Voluntary compliance.
♂Withholding.

1. AGI

Adjusted gross income, or AGI, is all the income you receive over the course of the year, including wages, interest, dividends and capital gains, minus things such as contributions to a qualified IRA, some business expenses, moving costs and alimony payments. AGI is the first step in calculating your final federal income tax bill.

2. Tax credits

Tax credits are much like credits you get from a store. After you calculate your tax bill, you can use the credit to reduce the amount of the check you must write to Uncle Sam. Tax credits are more valuable than tax deductions because they directly cut the amount of tax you owe, rather than reducing the amount of taxed income. A $200 credit, for example, will turn a $1,000 tax bill into only $800. A few credits could even give you a refund you weren't expecting.

3. Tax deductions

Tax deductions are expenses the Internal Revenue Service allows you to subtract from your AGI to arrive at your taxable income. In most cases, the lower your income, the lower your tax bill. If, for example, a single filer has income of $38,000 and $8,000 in deductions, then he would pay taxes on only $30,000. The IRS offers all filers a standard deduction amount (more on this later).

Some other deductions -- such as student loan interest, moving expenses, deductible IRA contributions and alimony payments -- also are listed directly on the 1040A or long Form 1040. The term "deductions" is most commonly associated with the itemized deductions (more on this later, too) that taxpayers who file Schedule A claim.

4. Standard deduction

This is a fixed dollar amount that taxpayers can subtract from their income. The standard deduction is available to all filers and is determined by the taxpayer's filing status. The amounts change each year because of inflation adjustments. You can find the current standard deduction levels listed on each of the three individual tax forms. Most taxpayers use this deduction method, which eliminates the need to itemize actual deductions such as medical expenses, charitable contributions and state and local taxes.

5. Itemized deductions

These are expenses that can be deducted from your AGI to help you reach a smaller income amount upon which you must calculate your tax bill. Itemized deductions include medical expenses, other taxes (state, local and property), mortgage interest, charitable contributions, casualty and theft losses, unreimbursed employee expenses and miscellaneous deductions such as gambling losses. Some itemized deductions must meet IRS limits before they can be claimed. When you itemize, you must file Form 1040 and detail your tax deductions on Schedule A.

6. Exemption

This is an amount the IRS lets you subtract from your income to reflect all the people who count on your income. You can claim as tax exemptions yourself, your spouse and your dependents. The IRS allows a set amount for each exemption and, as with deductions, this total is subtracted from your adjusted gross income to come up with your final, lower earnings amount upon which you must figure your tax bill. Your personal exemption amount is in addition to any tax deductions, either standard or itemized, that you claim.

7. Progressive taxation

This is the system in which higher tax rates are applied as income levels increase. The U.S. tax system uses progressive taxation with tax brackets starting at 10 percent and rising to 35 percent for the wealthiest taxpayers.

8. Taxable income

Taxable income is your overall, or gross, income reduced by all allowable adjustments, deductions and exemptions. It is the final amount of income you use to calculate how much you owe in taxes.

9. Voluntary compliance

This describes the philosophy upon which our tax system is based: U.S. taxpayers voluntarily comply with the tax laws and report their income and other tax items honestly.

10. Withholding

Also known as pay-as-you-earn taxation, the withholding method enables taxes to be taken out of your wages or other income as you earn it and before you receive your paycheck. These withheld taxes are deposited in an IRS account and you are credited for the amount when you file your return. In some cases, taxes also may be withheld from other income such as dividends and interest.

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