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Bankrate's 2009 Tax Guide
Tips & tools
A tax tip a day plus an array of tax tools, terms and training will help you through filing and beyond.
 
13 basic tax lessons
13 basic tax lessons
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Opponents of these restrictions refer to them as "stealth" or "backdoor" taxes that effectively raise taxes without increasing tax rates.

Tax-law changes over the past few years have eased these limits somewhat by allowing filers to make more money before losing various tax benefits. But be aware that they still exist, and your tax-cutting efforts could run straight into them.

9. Deductibility has its boundaries
Don't be duped by deductibility claims. While deductions are a valuable tax-reduction method, many have limits.

Some taxpayers encounter this issue when they make charitable donations. Say, for example, last year you wrote your favorite nonprofit a $500 check. To claim it as a deduction, you must itemize. But when you fill out your 2008 return, you note that as a single filer, you're allowed a standard deduction of $5,450. If your only itemized deduction is that $500 charitable gift, it will still help the charity but not your tax bill, since you'll take the larger standard amount.

Even if you do itemize, some deductions must meet a threshold before they help you. Only medical expenses that exceed 7.5 percent of your adjusted gross income can be deducted. Similarly, miscellaneous expenses must total more than 2 percent of your income or they are of no tax value.

Being aware of deductibility limits can help you establish a tax strategy to get around them. One approach is bunching, where you concentrate your deductible expenses in one year so you can itemize. Then the next year, you might take the standard amount. It might make sense to alternate your deduction method between standard and itemized from one year to another.

10. Earned and unearned are taxed differently
In addition to the regular tax brackets, your income is taxed differently depending on how you acquire it. The IRS generally characterizes income as earned or unearned.

The rule of thumb for earned income is that it comes from a business activity. This includes money you get from your job, either by hourly wages or salary, along with tips, bonuses and some fringe benefits. It also covers any self-employment money you make, either as your main work or a part-time job.

Unearned income typically comes from investment sources, inheritances or what the IRS calls passive activities, such as rents from property you own. Much of unearned income is taxed at different rates than ordinary income. You face lower rates, for example, on capital gains and dividends you receive.

But a lot of unearned income, even with its lower rates, isn't necessarily good. You could be closing other tax avenues.

"You have to have earned income to make an IRA contribution," says LeValley-Cocovinis. "Eligibility for a lot of credits also depends on earned income.

"You might think, 'Oh, I'm getting away with something.' Yes, you are, but you could be missing out, too. If you're playing with getting earned income down, you're cheating yourself in other ways, like Social Security.

"Like it or not, you're paying into it, so you should get what you deserve."

11. Extension to file means just that
The IRS allows you more time to get your return in and even simplified the process. Now, you only have to file Form 4868 to get six more months to complete your taxes. Previously it was a two-step, two-form process.

-- Updated: Feb. 13, 2009
 
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