Few Things To Know About Tax Deductions
Few Things To Know About Tax Deductions
We are given two choices for filing taxes - either paper filing or online filing. Of the two, the more convenient is of course filing online. For details on how to file taxes accurately and without much difficulty, visit the IRS website www.irs.gov. Whichever way you want to file your tax, it's more important is to know about personal exemptions, tax deductions and tax credits in order to save money.
A personal exemption reduces your taxable income so you end up paying lower taxes. You may be even luckier if the exemption brings you to a lower tax bracket. For the year 2010, personal exemption is $3650 per person, same as last year's amount. In the year 2008, the amount was $3,500. It is indexed yearly for inflation.
You can claim an exemption for yourself, your spouse if applicable, and on any dependent you support. However, you need to follow some regulations as to who you can claim as dependents. Take note that if someone else claims you as a dependent then you are not entitled for personal exemption anymore. Also, you and your spouse can't claim the same dependents: the exemption applies per person.
Remember, personal exemption of $3650 is not deducted on tax but on your taxable income. Say for example your filing status is married filing jointly' with original taxable income of $100,000. This makes you under the marginal tax rate of 25%. So the money you save on personal exemption is $912.50 (calculation is simple: $3650 multiplied by 25%). For you and your spouse, that will be multiplied by two so you save $1825.
In the previous years, there were phase-out limits. Basically, these limits apply to income thresholds where you will lose the ability to get the full amount of personal exemption. A worksheet was provided by the IRS website for specific adjustment amounts of exemption when income is beyond the limit. Luckily, phase out limits do not apply for the year 2010 so you don't need to worry about not being able to apply for personal exemption.
The requirement for personal exemption application is very basic. You just need your Social Security number as well as the numbers of the individuals you are claiming.
According to the IRS report, the tax claims which takes the largest amount is on personal exemptions. Most taxpayers claim their exemptions but there are still a lot of tax benefits that are disregarded. You may know that tax credits have far greater weight compared to tax deductions like personal exemptions. Tax deductions are deducted against your taxable income while tax credits are deducted on the amount of tax you have to pay. An example of tax credit provided by the government is the tax credit for first time homeowners, which may reach up to $8000. This amounts to a pretty huge deduction in your taxes.
If you do a bit more research or spend some time on IRS website, you will come across with different types of tax deductions and tax credits. Don't let ignorance make you pay more than you should be paying.
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