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Money Girl

212 MG Tax Boot Camp: Session 1

Find out how tax deductions and tax credits save you money. Learn which deductions and tax credits you're eligible for and how to use them to pay less tax. http://j.mp/MoneyBooks

Broadcast on:
16 Mar 2011
Audio Format:
other

Find out how tax deductions and tax credits save you money. Learn which deductions and tax credits you're eligible for and how to use them to pay less tax. http://j.mp/MoneyBooks

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Card has no cash access and expires in six months. [MUSIC] Hi friends, and welcome to the Money Girl Podcast. [MUSIC] I'm Laura Adams, the author of the new book, Money Girl Smart Moves to Grow Rich. This is the first podcast in a three-part series we're calling Tax Bootcamp, because Uncle Sam wants you, but he also wants your money. Taxes are a part of life, but no one, at least no one I know, wants to pay more than their legal share. So you bootcamp recruits can call me Sergeant Adams for the next few weeks. I won't scream for push-ups or tell you that you can't handle the truth, but I will expect you to pay close attention. Taxes certainly aren't the most stimulating personal finance topic out there. But if you don't go AWOL on this bootcamp series, you'll learn how to pay less tax, save more money, avoid getting into trouble with the IRS, and get last-minute filing tips that'll keep you calm and cool. In this first episode of the series, I'm going to cover what you really need to know about tax deductions and tax credits. Why should you care about them? Well, because they can cut your tax bill, or even increase your refund. A true tax warrior fights to claim every single deduction and credit that they qualify for, so they never pay more tax than they absolutely have to. So let's start with deductions. A tax deduction is an amount that the IRS allows you to subtract from your taxable income. When you reduce your taxable income, you lower your tax liability. For example, if your taxable income is 40,000 and you're eligible to claim 10,000 in allowable deductions, then you only have to pay tax on 30,000, not 40,000. That makes a huge difference. The trick with claiming tax deductions is that to be eligible for some of them, you have to itemize your deductions. Itemizing isn't merely as complicated as it may sound. Here's the deal. There are two ways you can file your tax return by itemizing deductions or by taking a standard deduction. Itemizing simply means that you list each deduction on a form called Schedule A and submit it with your tax return. The standard deduction, on the other hand, is a fixed amount of deductions based on your tax filing status and it can change from year to year. You get to choose the option that gives you the lowest tax bill and saves you the most money. For instance, if you're a single taxpayer, your standard deduction for 2010 is $5,700. If you can come up with more than $5,700 in total allowable deductions to itemize, you'll save more money by itemizing than you would by claiming the standard deduction. It's important to remember that lots of people overpay taxes every year because they're just too lazy to keep up with their deductions. I'll admit that taking the standard deduction is easy because you don't have to gather any records or do any calculations on Schedule A. But since you listen to Money Girl, you know that taking the easy route doesn't necessarily save you money. Always figure your taxes both ways and pick the method that lowers your tax bill the most. The best way to learn about all the potential deductions to itemize is to look at Schedule A. For 2010, the itemized deductions include the following, medical and dental expenses, taxes you paid, such as state income tax, sales tax, real estate tax, and tax on certain motor vehicles, charitable gifts to qualified organizations, casualty and theft losses, job expenses that are not reimbursed by your employer, tax preparation fees, safe deposit box fees, and interest you paid for investments and for a home mortgage, including points and mortgage insurance premiums. As a side note, I've been getting lots of questions lately about claiming the home mortgage interest deduction, so I put together a short video with frequently asked questions to help you understand who's eligible to claim it. You can watch the video at smartmousse-to-growrich.com. Be aware that some tax deductions are limited based on your income. For example, you can only deduct the amount of your medical and dental expenses that exceed 7.5% of your adjusted gross income. Schedule A walks you through all the rules that apply for each itemized deduction. But what if you don't have enough deductions to make itemizing pay off? Don't worry, there are deductions you can take when you claim the standard deduction too. They're listed on the tax return called Form 1040 in the section labeled adjusted gross income. They include the following for 2010. Traditional IRA contributions up to a maximum of 5,000 or 6,000 if you're age 50 or older. Health savings account contributions up to a maximum of $6,150 when you have a high deductible health plan. Moving expenses if you're relocating more than 50 miles for a new job. Alimony you paid. Educator expenses up to $250. Business expenses for government workers, reservists, and performing artists. Student loan interest up to $2,500. Tuition and fees paid to a qualified institution up to $4,000. And self-employment expenses, such as one half of the self-employment tax, contributions to a SEP, simple or qualified retirement plan, and health insurance payments. OK, this isn't a complete list, but it should be enough information to help you know if you can save money using tax deductions, whether you itemize or claim the standard deduction. You spent a long year. After investing billions to light up our network, T-Mobile is America's largest 5G network. Plus, right now, you can switch, keep your phone, and we'll pay it off up to $800. See how you can save on every plan verse for eyes and AT&T at tmobile.com/keepandswitch. 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It's the perfect time to experience the quality and reliability that has made Dickies a trusted name for over a century. Now let's switch gears and talk about another way to legally reduce your taxes. Tax credits. I love tax credits because they're even more effective at slashing taxes than deductions. Here's why a tax credit can be more valuable than a deduction. A tax deduction reduces the income on which your tax is calculated. But a tax credit cuts your actual tax bill dollar for dollar. For instance, if you owe $1,000 in taxes, getting a $600 tax credit means you save that full amount and only owe $400. The following are credits that you may be eligible to claim for 2010. The child independent care credit pays up to $6,000 for the cost to pay someone to care for your children under the age of 13. Or adult dependence, so you can work or look for a job. The child tax credit pays up to $1,000 per eligible child you have under the age of 17. The American Opportunity Tax Credit pays up to $2,500 for the cost of qualified expenses for higher education through 2010. The lifetime learning credit pays up to $2,000 for coursework at a qualified institution. The home buyer credit pays up to $8,000 for a home that was purchased by September 2010. The residential energy credit pays 30% of the cost of certain energy-efficient improvements you make to your home in 2009 and 2010 up to $1,500. The retirement savings contribution credit helps low and moderate income taxpayers who make contributions to a retirement plan. And the earned income tax credit helps low and moderate income taxpayers depending on their income and family size. This is one of the most overlooked tax benefits and it can result in a tax refund of over $5,000. I hope this first installment of tax bootcamp has taught you something you didn't know about tax deductions and credits. Again, this isn't a complete list, but you'll find links to everything I've mentioned on the Money Girls section at quickandnertytips.com. If you have questions about your tax situation or feel too overwhelmed to file your own return, be sure to hire a qualified tax preparer or accountant. They can save you more money than they cost when they help you maximize tax benefits that you're eligible for. If you like the tips you get in the Money Girl podcast, I think you'll like my book, Money Girls Smart Moves to Grow Rich. I devote a whole chapter to taxes so you can be sure you know what you should. The book tells you what you need to know about money without bogging you down with what you don't. It's available at your favorite bookstore in print or is an e-book for your Kindle, Nook, iPad, PC, Mac or smartphone. You can even download two free book chapters at smartmoves2growrich.com. Be sure to connect with me on Twitter. My username there is @laraattoms. I'm also on Facebook. 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