Other People Are Reading
One of the first things you do when preparing your federal income tax return is determine your filing status. The IRS has five filing statuses: single, married filing jointly, married filing separately, head of household and qualifying widow(er) with dependent child. Determining filing status is the first step in eventually determining how much of your taxes you will get back in the form of a refund. The IRS has a step-by-step, online questionnaire that helps determine which filing status works best for your tax situation.
Adjusted Gross Income
Determining your adjusted gross income involves entering certain income on Form 1040, 1040A or 1040EZ, and subtracting allowable expenses. Income can include amounts on your W-2, taxable interest, alimony you received, pension payouts and Social Security benefits, among others. Deductible expenses may include payments made to a health savings account, self-employed insurance premiums made during the tax year, alimony you paid and tuition and fees paid for an eligible person. Your AGI is the mathematical starting point for the final determination of your refund amount.
Exemptions and Dependents
If no one can claim you on a separate tax filing, claim yourself as an exemption. If you file as married filing a joint return, claim your spouse as an exemption too. In most cases, you claim your children as dependents. There are other relatives that may qualify for dependent status. In Publication 929, the IRS outlines the rules that apply to an individual’s dependent circumstances. Since each exemption amounts to a $3,650 deduction from your AGI, each dependent claimed goes a long way toward reducing your income tax bill.
Should you itemize? The basic answer is simple. If itemizing creates a larger tax deduction than taking the standard deduction, then itemize. Each person’s itemized amount depends on a variety of factors. Generally, those who itemize do so because they paid interest or taxes on a home, had large uninsured medical expenses, experienced catastrophic losses not protected by
insurance or made significant charitable donations. Itemize by filing Schedule A with Form 1040.
If the standard deduction for your filing status is larger than the itemized total and you are permitted to use the standard deduction, then take it. For the 2010 tax year, a person filing as a single taxpayer has a standard deduction amount of $5,700. If you file as married filing jointly, the standard deduction increases to $11,400. If married and filing separately, the amount stands at $5,700 for each spouse. Those who file as head of household enjoy an $8,400 standard deduction. A qualifying widow(er) gets a standard deduction of $11,400. Additional deductions may apply if the taxpayer is 65 or older or blind. These deductions go a long way toward ending up with a tax refund instead of a tax bill.
One of the most lucrative tax credits offered is the Earned Income Tax Credit. EITC is a refundable credit, which means you get money back even if you did not pay or paid a minimal amount of federal income tax. Other tax credits you may want to investigate are the child and dependent care credit, the child tax credit and the retirement savings contributions credit. All have the ability to reduce your bottom line tax liability and increase your refund amount.
The bottom line is that you may be able to recoup all the taxes you paid in during the tax year if your income falls within parameters established by the federal tax code. Pay special attention to all deductions and credits, taking advantage of any that apply to your tax situation. Although most state and local income tax filings rely on information provided through your federal return, state and local tax laws can differ considerably from federal tax laws. Some states and localities even offer an EITC. Check with your state or local tax authority for direction. When in doubt with any tax issue, contact a tax professional for advice.