What's the difference between a taxidermist and a tax collector? According to Mark Twain, "The taxidermist takes only your skin!" Many Americans would agree with him – tax bills often seem unreasonably high. Fortunately, there are many completely legal ways to reduce your taxes and keep more of your hard-earned money for yourself and your family. They're called tax breaks.
Tax breaks are provisions of the income tax code that reduce the amount you and your family have to pay. Some people think claiming tax breaks is cheating – something greedy corporations and rich people do – but it's not. The famous Judge Learned Hand once stated, "There is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike, and all do right, for nobody owes any public duty to pay more than the law demands." You are completely entitled to every tax break you qualify for, and not taking those breaks is only giving the IRS a gift they don't deserve.
Here are five simple rules to remember when looking for tax breaks:
1. Don't lie. If you can't exempt, defer, or cancel out a certain part of your income, you must pay taxes on it. Hiding, renaming, or lying about your money is a sure way to get audited, fined, and even arrested in some cases.
2. Obey the spirit as well as the letter of the law. Congress creates doesn't create tax breaks just to be nice. Sometimes they want to boost the economy, sometimes they want to save the environment – whatever the reason, make sure that it applies to you. Bending tax law to fit your situation can be illegal. If you're not sure, consult a tax professional.
3. Take tax credits before deductions. Tax credits are better than tax deductions. A tax credit removes a lump sum from your tax bills; deductions reduce your taxable income, so their worth varies according to your tax bracket. For example, say you are in the 30% bracket. A $1000 tax credit directly reduces your tax bill by $1000. A $1000 deduction, on the other hand, would only save you 30% of $1000, or $300.
4. File the right form. Some tax breaks require you to use a certain tax form. You may need to file the "long form," or 1040, rather one of the simplified forms (1040A or 1040EZ). Be sure to read all the instructions carefully and talk to a tax professional if you have problems.
5. Beware the Alternative Minimum Tax. The alternative minimum tax, or AMT, is often referred to as a "shadow tax system," because it doesn't follow the same rules as your regular income tax. The AMT was established to make sure everyone pays a certain minimum tax, no matter how many deductions you qualify for. If your regular tax falls below this minimum, you will have to pay an alternative minimum tax.
You can begin today – find out what tax benefits you qualify for and start taking a ‘break' from high taxes!
Ron Finkelstein is NOT a Tax Attorney or an accountant. He is merely a small business owner who has paid a lot of money over the years to learn a whole lot about Taxes and Time Management.
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