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None of us relishes the thought of giving the government our hard-earned money. Unfortunately, there may be times when we have no alternative. Some years are better (or worse, as the case may be) than others, and you could find Uncle Sam staring at you with his hand out on April 15th. But owing $300 is a far cry from owing $3,000, so be sure that you're taking advantage of each and every tax break the government says you're entitled to. Listed here are just a few simple strategies that could make a really big difference in your 1040's bottom line:
- Tax credits are very valuable, even more valuable than tax deductions. Why? Because tax credit can be applied directly to the taxable amount you owe. In other words, for every dollar of tax credit you're entitled to, you can reduce your tax liability by one dollar. That's why credits are called 'dollar-for-dollar' reductions. Tax deductions, on the other hand, while certainly good, can only be subtracted from your taxable income. Therefore, it would take a considerably larger amount of tax deductions than credits to have the same bottom-line effect on your tax bill. There are numerous tax credits available to take advantage of; you may very well qualify for one or more of them.
For example, working parents that must pay for someone to care for their children or other dependents may be eligible for the Child and Dependent Care Credit. Parents with college-age kids may be able to claim the HOPE- or Lifetime Learning education credits. And the Earned Income Credit is available to many lower- to middle-income single and married taxpayers. Again, these are just a few of the myriad tax credits available – some for very special circumstances. Do your homework to see which ones might be for you.
- Look very closely at itemizing your deductions. If you have a mortgage, a home office, lots of medical bills or any number of other expenses that may be tax-deductible, you could be giving the government much more money that you need to. Many people don't take the time to itemize because it's a bit more complicated and time-consuming than simply taking the standard deduction. But if you'd just as soon keep your money, you owe it to yourself to at least 'run the numbers' (or have your tax preparer do so) to determine which way is best for you.
- Don't simply take your filing status for granted; you may actually have a choice that can be used to your best advantage. For instance, if you're married, you can file either jointly with your spouse or separately. If you're a single parent, you have the option of filing either as a single individual or as a head of household. The 'joint' and 'head of household' selections provide for a larger standard deduction against your taxable income. Again, if you have a choice, exercise a little due diligence to see which one puts you ahead. For more information, be sure to consult an experienced tax advisor or the IRS.
