1. AGI – Adjusted gross income, AGI, is all the income you receive over the course of the year such as wages, interest, dividends and capital gains minus things such as contributions to a qualified IRA, some business expenses, moving costs and alimony payments. The adjusted gross income is the first step in calculating your final federal income tax bill.

2. Credits — Tax credits are much like credits you get from a store. After you calculate your tax bill, you can use the credit to reduce the amount of the check you must write to Uncle Sam. Tax credits are more valuable than deductions because they directly cut the amount of tax you owe, rather than reducing the amount of taxed income. A $200 credit, for example, will turn a $1,000 tax bill into only $800. A few could even give you a refund you weren’t expecting.

3. Deductions – Deductions are expenses that the Internal Revenue Service allows you to subtract from your AGI to arrive at your taxable income. In most cases, the lower your income, the lower your tax bill. If, for example, a single filer has income of $38,000 and $8,000 in deductions, then he would pay taxes only on $30,000. The IRS offers all filers a standard deduction amount (more on this later). Some other deductions, such as student loan interest, moving expenses, deductible IRA contributions and alimony payments, are also listed directly on the 1040A or long Form 1040. The term is most commonly associated with the itemized deductions (more on this later, too) that are claimed by taxpayers who file Schedule A.

4. Standard deduction — This is a fixed dollar amount that a taxpayer can subtract from his or her income. The standard deduction is available to all filers and is determined by the taxpayer’s filing status. The amounts change each year because of inflation adjustments; you can find the current standard deduction levels listed on each of the three individual tax forms. This deduction method is used by most taxpayers and eliminates the need for them to itemize actual deductions such as medical expenses, charitable contributions or state and local taxes.

5. Itemized deductions — These are expenses that can be deducted from your AGI to help you reach a smaller income amount upon which you must calculate your tax bill. Itemized deductions include medical expenses, other taxes (state, local and property tax), mortgage interest, charitable contributions, casualty and theft losses, unreimbursed employee expenses and miscellaneous deductions such as gambling losses. Some itemized deductions must meet IRS limits before they can be claimed. When you itemize, you must file Form 1040 and detail your deductions on Schedule A.

6. Exemption — This is an amount that the IRS lets you subtract from your income to reflect all the people who count on your income. Exemptions can be claimed for yourself, your spouse and your dependents. The IRS allows a set amount for each exemption and, as with deductions, this total is subtracted from your adjusted gross income to come up with your final, lower earnings amount upon which you must figure your tax bill. Your personal exemption amount is in addition to any deductions, either standard or itemized, that you claim.

7. Progressive taxation – This is the system in which higher tax rates are applied as income levels increase. The U.S. tax system uses progressive taxation with tax brackets starting at 10 percent and rising to 35 percent for the wealthiest taxpayers.

8. Taxable income — Your overall, or gross, income reduced by all allowable adjustments, deductions and exemptions. It is the final amount of income you use to figure just how much tax you owe.

9. Voluntary compliance — This describes the philosophy upon which our tax system is based: that U.S. taxpayers voluntarily comply with the tax laws and report their income and other tax items honestly.

10. Withholding – Also known as pay-as-you-earn taxation, this method enables taxes to be taken out of your wages or other income as you earn it and before you receive your paycheck. These withheld taxes are deposited in an IRS account and you are credited for the amount when you file your return. In some cases, taxes also may be withheld from other income such as dividends and interest.

@IRSTax

It’s now officially time to get serious about filing your 2011 Form 1040, especially if you expect a refund. Here are five little-known write-offs that could make your refund bigger or cut what you owe.

1. Medicare Insurance and Long-Term Care Premiums

You can claim a Schedule A itemized deduction for unreimbursed medical expenses, including health insurance premiums, to they extent they exceed 7.5% of your adjusted gross income, or AGI. (AGI is the number at the bottom of Page 1 of your Form 1040.) The 7.5%-of-AGI hurdle may seem insurmountable, but seniors can often clear it–especially if they remember to include the following in the medical expense pot:

*Premiums for Medicare Part B coverage. For 2011, the per-person Part B premium for most folks was $96.40 per month ($1,157 for the year). For higher-income folks, the premium could be as much as $369.10 per month ($4,429 for the year).

*Premiums for Medicare Part C coverage (so-called Medicare Advantage HMO-type coverage).

*Premiums for Medicare Part D coverage (for prescription drugs).

*Premiums for Medicare supplemental insurance (so-called Medigap coverage).

*Premiums for qualified long-term care insurance, subject to the following age-based limits for each covered person.

2. Medical Expenses Paid by Someone Else

As explained above, you can only deduct unreimbursed medical expenses to the extent they exceed 7.5% of your AGI. In a 2010 Tax Court decision, the IRS argued that a daughter could not deduct some medical expenses because she did not pay for them with her own money. Instead, her mother covered the expenses by directly paying the medical service providers. The Tax Court disagreed. The facts of the case demonstrated that the mother intended the payments to be gifts. Therefore, the Tax Court characterized the transactions as gifts from the mother to the daughter followed by payment of the expenses by the daughter with the gifted funds. So the daughter was allowed to count $24,559 of medical expenses that were actually paid by her mother in calculating her medical expense deduction. Source: Judith Lang, TC Memo 2010-286 (2010).

[Also see: If You Don’t File, Beware the Ghost Return]

Important Point: When you directly pay medical expenses for a person who is your dependent (meaning you pay over 50% of that person’s total support for the year), you can add the expenses you pay for the dependent to your own expenses and claim a deduction for the total to the extent it exceeds 7.5% of your AGI. That rule would have applied to the mother in this case if the daughter had been the mother’s dependent. Apparently she was not, so the deduction for the daughter’s expenses belonged to the daughter rather than the mother.

3. Real Estate Taxes Paid by Someone Else

The daughter in the 2010 Tax Court decision mentioned above was also allowed to claim an itemized deduction for $5,508 of local real estate taxes that were paid directly to the taxing authorities by her mother. Once again, the facts of the case demonstrated that the mother intended the payments to be gifts. Therefore, the Tax Court characterized the transactions as gifts from the mother to the daughter followed by payment of the taxes by the daughter with the gifted funds. So the daughter was allowed to deduct the taxes that were actually paid by the mother. Source: Judith Lang, TC Memo 2010-286 (2010).

[Also see: States with the most homes in foreclosure]

4. Home Mortgage Points Paid by Someone Else

Assuming you itemize deductions, you can write off points (including loan origination fees) that you pay to take out a mortgage to buy your principal residence. Surprisingly enough, you can also deduct mortgage points paid by the seller on your behalf to sweeten the deal. In fact, the IRS actually requires you to claim the deduction. If this happened to you last year, don’t ask questions! Just follow the government’s directions and claim a deduction for the seller-paid points on Line 10 or 12 of your Schedule A. Source: IRS Revenue Procedure 94-27.

5. Fees to Charge Taxes to Your Credit Card

Surprisingly enough, the IRS says you can treat credit card convenience fees paid to charge personal income tax bills (including estimated tax payments) as miscellaneous itemized deduction items reported on Line 23 of your Schedule A. Source: IRS instructions to Schedule A. This favorable rule apparently applies to fees to charge both federal and state income taxes. However, you only get a write-off to the extent your total miscellaneous itemized deductions exceed 2% of AGI (other miscellaneous expenses include unreimbursed employee business expenses, union dues, job hunting expenses, fees for tax preparation and advice, and investment expenses). Fill out lines 21-27 of Schedule A to see if you can benefit from claiming miscellaneous itemized deductions.

Source

@IRSTax