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If you don't itemize, don't fret: Uncle Sam has tax breaks for you

Single man looking for tax breaks. One child. Only debt is college loan. Good IRA. No itemizing, please.

If the Internal Revenue Service ran a personals service, it probably would get a lot of ads like this. There's a lot of hoopla, especially in tax filing season, about the deductibility of this and the deductibility of that.

But deductions are only good if you itemize, and most Americans don't. Instead, the majority of filers use the standard deduction.

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So what's a guy like the one in the ad to do when it comes to finding ways to cut his tax bill? Plenty.

If he paid alimony, contributed to a self-employed pension plan, paid student loan interest or had moving costs, they can help reduce his tax bill. Then there are various tax credits, which, if he qualifies, can chop his tax bill even more without a Schedule A anywhere in sight.

The price of convenience
In the tax world, simplicity has a price.

Folks who have uncomplicated tax lives tend to use Form 1040EZ. But they could be cheating themselves.

The EZ's appeal is that it's short and to the point. No fuss, no muss, but only one tax break. Even that -- the Earned Income Credit -- is not available if you make a good living.

For more tax breaks, consider filing a more detailed return. It may take a bit longer, but Form 1040A provides a dozen possible chances to reduce taxes. And you get more than double that number of tax-saving opportunities with the longer Form 1040.

Both of the longer returns offer adjustments to income, sometimes called above-the-line deductions because they are reported just before the line on each form where you tally your adjusted gross income. Like the classic Schedule A deductions, they reduce taxable income. Less income equals less tax. The only downside is that some adjustments require completion of another form or worksheet.

These longer returns also provide more tax credits that, like deductions, can help reduce what you owe. The added beauty of credits is that they slice your tax bill after you've already figured what you owe.

Income adjustment opportunities
The easiest way to reduce tax bills is to reduce income. Rather than turning down your next raise, try taking some of the income adjustments the IRS offers to filers of 1040A or 1040 form

If you're a teacher, don't skip the first income adjustment opportunity. The educator expenses deduction should let you use some of the money you spent on classroom materials to directly trim your taxable income. And it's not restricted to teachers; counselors, principals, aides and instructors at public or private elementary and secondary schools also can claim up to $250 they paid out of their own pockets for school supplies.

The amount is relatively small, but more taxpayers should be able to claim at least a portion of their school-related expenditures. In the past, educators could claim such costs only if they included them as miscellaneous itemized deductions on Schedule A. Even then, they couldn't be used unless all a filer's allowable sundry costs totaled at least 2 percent of adjusted gross income.

Next is the adjustment for traditional IRA contributions. Any retirement money you put away must follow the usual deductibility guidelines. For example, the limit is $3,000 and a portion of your deduction may be limited if you're covered by a pension plan at work.

If you are paying off a school loan, don't skip the next line. Here you can subtract up to $2,500 of interest paid on a "qualified" student loan. A loan qualifies in the IRS' eyes if the money pays for your higher education expenses or those of your spouse or a person who was your dependent when the loan was obtained. And former students paying off longer-term loans no longer have to worry about the 60-month limit on interest payments.

Another education-related income adjustment, the tuition and fees deduction, could reduce your taxable income by up to $3,000. As with the student loan deduction, you qualify if you pay IRS-accepted higher education expenses for yourself, your spouse or a dependent. The deduction is not available, however, if you make more than $65,000 or if you use claim the Hope or Lifetime Learning tax credits. And if you used money from a state tuition plan, a Coverdell educational savings account or interest on savings bonds you cashed to pay for class, you have to subtract those amounts from your expenses to arrive at the allowable tuition and fees deductible amount.

Instruction books for both forms -- Form 1040 instructions and Form 1040A instructions -- provide detailed eligibility guidelines as well as worksheets for these adjustments to help you determine if they can help your specific tax situation.

Additional 1040 adjustments
This is the end of the line for adjustments found on Form 1040A. But with the 1040, the income adjustment list keeps going.

You can subtract moving expenses that meet requirements detailed on Form 3903.

If you're self-employed, you get several income adjustments:

  • Half of self-employment taxes. Use Schedule SE to figure the amount.
  • 100 percent of any health insurance premiums, including amounts for family coverage.

  • Contributions to self-employment pension plans, like Keoghs, SIMPLEs or SEPs.

Did you cash in a certificate of deposit and pay an early withdrawal penalty? The IRS lets you subtract that fee here.

And divorced filers get a chance to recoup alimony payments. Be sure to include the Social Security number of your ex-spouse. The IRS wants to make sure he or she reports the payments as income, and if the recipient's tax ID number isn't on your return, the adjustment could be disallowed.

There also are several other specific deductions -- such as contributions to an Archer medical savings account, performing arts expenses, jury duty pay given to your employer, and the increasingly popular deduction for the purchase of a clean-fuel vehicle -- available to some 1040 filers. Details on what they are and who is eligible can be found in the Form 1040 instructions.

These adjustments, when subtracted from total income, can dramatically reduce a taxpayer's total income, resulting in what is known as adjusted gross income. When you use this lower AGI, your taxable income -- what you get after next subtracting your exemption and standard deduction amounts -- will be less, as will your eventual tax bill.

But don't stop. Now it's credit time.

Using credits to get to zero tax
While the long 1040 is the clear winner in the income adjustment sweepstakes, the 1040A offers more competition in the credits contest.

Credits cut your bill directly, dollar-for-dollar, because they are subtracted from the actual tax you owe. Both of the longer 1040 forms allow eligible taxpayers to take:

  • Child and dependent care credit helps pay the caretaker costs for children or older dependents so that the taxpayer can work. Filing guidelines are in Form 2441 instructions for 1040 filers, Schedule 2 for 1040A users.
  • Elderly or disabled credit is available to older taxpayers or those receiving disability payments. Eligibly details are in Schedule R.
  • Child tax credit means your first two eligible children are worth a $1,000 credit each.
  • Education credits let you recover some of your schooling costs. Form 8863 has details on the Hope credit for expenses during the first two years of college and the Lifetime Learning credit for courses after that. You might be able to get $1,500 for the Hope and $2,000 for Lifetime expenses. But be careful: You can't use both credits for the same student expenses.
  • Adoption credit helps cover some costs of adopting if the requirements outlined in the instructions for Form 8839 are met.
  • The retirement savings contributions credit, designed to encourage lower-wage earners to save more. With this credit, eligible taxpayers could reduce their tax bills by as much as $1,000. The exact credit depends upon how much a worker adds to an IRA (traditional or Roth) or to a retirement plan.

Since these credits are subtracted from the amount of tax you owe, they can take your tax bill down to zero if you have enough credits. But that's as far as they go, and as such are called nonrefundable credits.

Other, more specific, nonrefundable credits provide the slim margin of victory for Form 1040 in the credit contest.

It's only on the longer form that a taxpayer can get credit for foreign income taxes paid. These generally are in connection with stocks or other investment accounts, and might require completion of Form 1116.

There also are several other specific credits -- such as ones for electric vehicle owners, first-time homeowners in Washington, D.C., and state or local mortgage credits -- available to some 1040 filers. Again, details on who is eligible for these can be found in the Form 1040 instructions.

Moneymaking credits
Two tax credits are refundable. They can get you cash back from the IRS if you don't owe any tax or increase any refund you have coming. They are:

  • Additional child tax credit: Taxpayers who support only one or two children but who don't earn much money may be able to get a bigger tax break thanks to this credit. To file for it, fill out Form 8812.
  • Earned income credit: This is the only credit also available to 1040EZ filers and it can be a great benefit for workers who don't make much money. This tax break returns to qualified individuals a portion of the taxes they paid. It even can produce a tax refund for eligible filers who had no tax liability. The credit is larger low-income taxpayers supporting children, but even childless filers might be eligible for a credit here. Check IRS worksheets in the 1040 and 1040A instruction books to determine eligibility and credit amounts. If you qualify, you must file Schedule EIC.

Time is tax money -- saved or lost
All these adjustments and credits are available to any eligible taxpayer, regardless of whether they take the standard deduction or itemize. Because those who itemize deductions are already in the form-filing mode, they tend to pay more attention to these tax-saving opportunities.

Many taxpayers accustomed to Form 1040EZ often complain about the time it takes to complete the extra forms and worksheets. But if you don't itemize, these forms offer you the best chance to cut your tax bill. A bit more time could mean added money to you, instead of to Uncle Sam.

The savings may even be big enough to let you hire someone to fill out all paperwork and still end up with extra cash this tax season!

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