How to Straighten Out Your Tax Affairs in 2010

Utter the word “taxes” in front of  and you are sure hear a loud groan. Frankly, there are valid reasons behind this response: First of all, paying your taxes annually can be a financial burden, especially with the economic hard times which we are going through these days. You may feel like being taken to the cleaners after you view your paycheck after withholding of federal income taxes (not to mention state income taxes as well as Social Security and Medicare taxes). 

Second, tax laws are quite complicated and are constantly evolving. Did you know that the federal tax rules which used to consist of only 400 pages in 1913 have swelled up to around 80,000 pages in 2009?!! Congress changes the tax law to a greater or lesser extent every single year—and this year will be no exception! 

So how can you fight the feeling of dread which comes when you are doing your taxes? It helps to know that the income tax law is peppered with large number of tax breaks to which you may be entitled. Such tax breaks allow you to not report certain economic benefits you enjoy or to subtract certain expenses from your total income or even directly from your tax bill. 

In order to take advantage of every tax break which you may be entitled to without ending on the bad side of theInternal Revenue Service (IRS), there are a few simple rules to keep in mind. These include: 

- You must report all of your income unless a specific law allows you to exclude or exempt it (so that it is never taxed) or defer it (so that it is taxed at a later time). 

- You can claim deductions only when and to the extent the tax law allows. Deductions are referred to as a “matter of legislative grace”; Congress doesn’t have to create them and does so only for some purpose (for example, to encourage economic activity or to balance some perceived inequity in the tax law). 

- Tax credits are   way more than tax deductions. A credit reduces your tax   on a dollar-for-dollar basis; a $5,000 credit   you $5,000 in taxes. A deduction is worth only as much as the top tax bracket you are in. Suppose you are in the 28 percent tax bracket, which means this is the highest rate you pay on at least some of your income. If you have a $2,000 deduction, it is worth $560 (28 percent of $2,000) because it saves you $560 in taxes you would otherwise have to pay. 

- Even if your income is modest, you may have to file Form 1040 (the so-called “long form”), rather than a simplified return (Form 1040A or 1040EZ), in order to claim certain tax benefits. 

- In a number of cases, different deduction rules apply to the alternative minimum tax (AMT). This is a shadow tax system which ensures that you pay at least some tax if your regular income tax is   than it would have been without certain deductions. 

In conclusion, knowing what to look out for will help you plan   and organize your activities in such a way that you’ll share less of your hard-earned money with Uncle Sam.