Essential Tax Prep Tips

Exemptions

Paying taxes, especially if you owe at the end of the year, can definitely be unpleasant, but there are many ways to lighten your burden. In the most basic terms, the number of exemptions you can take reflects the number of people in your household that you’re responsible for.

Generally, the more exemptions you take, the less you’ll pay in taxes during the year. But exemptions don’t mean you’re exempt from taxes entirely; each exemption is worth about $3,650 for the 2009 tax year, according to the Internal Revenue Service.

There are two types of exemptions you can take: personal exemptions for you and your spouse, and dependency exemptions for your children or others who rely on you financially.

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Deductions

Deductions, which is money you can subtract from you overall income, can do wonders in reducing your tax burden, especially if you were job hunting last year, you had high medical bills or you’ve incurred business expenses that your employer hasn’t reimbursed you for. To deduct these expenses, you’ll probably have to itemize. That is, unless the cost of these expenses is less than the standard (and easier) deduction.

For your 2009 tax return, the new standard deductions, which have increased due to inflation, are $11,400 if you’re married and filing jointly, $5,700 if you’re single or married and filing separately or $8,350 for heads of household, according to the IRS.

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Credits

Credits can be and even better way to reduce your tax burden. That’s because credits come straight out of the taxes you owe as opposed to deductions which come out of your income.

Low-income earners can benefit from the Earned Income Tax Credit and the Saver’s Credit for example, if they meet certain income requirements.

Regardless of your income, you may also be able to claim credits for child care and energy-saving home improvements, for example.

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When You’re Married

Just because you’re married, it doesn’t mean you and your spouse should definitely file your taxes jointly. There can actually be significant tax advantages to filing separately.

You’ll want to consider Married Filing Separately status if each of you has a taxable income and at least one person has significant itemized deductions, according to SmartMoney.com. You can also benefit from the married filing separately status if your medical expenses equal 7.5% or more of your own income or you have unreimbursed work expenses, which are contingent on being 2% of your income.

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Status Changes

If you got married or divorced last year, you’ll use marital status as of Dec. 31, SmartMoney.com notes. If your spouse died last year, you can choose either to file as Married Filing Jointly or Married Filing Separately.

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Dependents

If your parents have claimed you as a dependent on their taxes, you may still have to file your own tax return depending on how much you’ve earned during the year. And if you do, you can’t claim a personal exemption, the IRS says.

If you’re the one considering claiming another as a dependent, remember that they have to be “a U.S. citizen, U.S. resident alien, U.S. national or resident of Canada or Mexico for some part of the year,” according to the IRS.

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Donations

If you made any charitable donations during 2009, you may be able to deduct them. They’ll have to be donations to “qualified organizations,” such as religious, educational, scientific and literary groups and those that work to prevent cruelty to animals or children.

If you receive anything in return for your donation, you’ll have to subtract the value of that item from the amount you donated to reach the amount you can deduct.

If you’ve donated property as opposed to cash, like stocks or a car for example, you may have to have your donation appraised or find the fair market value of the item.

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Education

If you’ve received an education, even from a single class last year, there may be a tax benefit for you worth thousands of dollars. There’s the Hope Credit, which only applies to students who are pursuing a degree and enrolled in classes at least half time for any academic period during the year.

The Lifetime Learning Credit can be applied regardless of how many classes you’re taking and whether you’re planning to get a degree, the IRS notes.

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Job Search Expenses

If you’re one of many Americans who’s had to search for a new job in the last year, deducting your job search expenses may be a financial relief. And you can deduct them regardless of whether you’ve found a new job or are still looking, according to the IRS.

Deductible costs include those you incurred by preparing and sending out your resume and travel to a new area to look for a job, but you can’t take these deductions if your job search wasn’t within your current industry, or you’re looking for a job for the first time.

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Taxes on Unemployment

If you received any federal unemployment compensation last year, don’t forget that it counts as taxable income. If you contributed to a private unemployment fund, however, you’re only taxed on the payouts you receive that are in excess of what you put in, the IRS says.

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Filing For an Extension

Even if you don’t owe tax money to the government, you still have to file your taxes on time or possibly face penalty fees. If you need more time to file your return, you’ll have to file IRS Form 4868 and submit it by April 15. After that, you have until October 15 to file your taxes.

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Filing Electronically

If the thought of doing your taxes on your own this year is particularly daunting, but you can’t necessarily afford to hire someone to do them for you, e-filing may help you sort through your information to figure out what you really need to know to file your return without have to sift through dozens of pages of worksheets and instructions.

You may even be able to e-file free if you meet certain eligibility requirements.

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AMT

More and more American wage-earners are subject to the Alternative Minimum Tax, which was initially meant for the wealthy, because it’s not adjusted for inflation. So now, if you made more than $46,700 in 2009, there’s a chance you’ll have to pay more in taxes this year than you might traditionally. To determine whether you’ll have to pay this higher amount, the IRS offers the AMT Assistant tool.

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Paying in Installments

If you owe taxes but you can’t pay back the whole amount upfront, you can arrange an installment plan by filling out a request using IRS Form 9465. You’ll have to pay a $105 fee to set it up, or $52 if you set up automatic deductions from your bank account.Photo Credit: bfishadow