Barbara Weltman - AARP J.K. Lassers 1001 Deductions and Tax Breaks 2011. Your Complete Guide to Everything Deductible

MAKING YOUR MONEY WORK FOR YOU

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J.K. LASSER'S

1001 DEDUCTIONS AND TAX BREAKS 2011

Look for these and other titles from J.K. LasserPractical Guides for All Your Financial Needs

J.K. Lasser's Small Business Taxes by Barbara Weltman

J.K. Lasser's New Tax Law Simplified by Barbara Weltman

Copyright 2011 by Barbara Weltman. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.

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Introduction

Say the word "taxes" and most people groan. There are good reasons for this response: First of all, the cost of paying your taxes annually can be a financial burden. You may feel taken to the cleaners every time you view your paycheck after withholding for federal income taxes (not to mention state income taxes as well as Social Security and Medicare taxes).

Second, the tax law is very complicated and changing all the time. The federal tax rules grew from 400 pages in 1913 to more than 80,000 in 2009; this doesn't count the massive changes made by health care reform and other legislation in 2010. Congress changes the tax law to a greater or lesser extent every single yearand this year is no exception! In addition, new court decisions and IRS rulings appear each day, providing guidance on how to interpret the law.

Third, you have to know what the tax rules are and can't claim ignorance to avoid taxes and penalties. Even if you use a tax professional or tax preparation software to prepare your return, you remain responsible for your taxes. The Tax Court has noted that using software is not an automatic excuse to avoid underpayment penalties.

How can you combat the feeling of dread when it comes to taxes? It helps to know that the tax law is peppered with many, many tax breaks to which you may be entitled. These breaks allow you to not report certain economic benefits you enjoy or to subtract certain expenses from your income or even directly from your tax bill. As the famous jurist Judge Learned Hand once stated (in the 1934 case of Helvering v. Gregory in the Court of Appeals for the Second Circuit):

Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike, and all do right it for nobody owes any public duty to pay more than the law demands.

So get your tax affairs in order and reduce what you pay each year to Uncle Sam!

In getting a handle on how to do this by taking advantage of every tax break you may be entitled to without running afoul of the Internal Revenue Service (IRS), there are some simple rules to keep in mind. They include:

• You must report all of your income unless a specific law allows you to exclude or exempt it (so that it is never taxed) or defer it (so that it is taxed at a later time).
• You can claim deductions only when and to the extent the law allows. Deductions are referred to as a "matter of legislative grace"; Congress doesn't have to create them and does so only for some purpose (for example, to encourage economic activity or to balance some perceived inequity in the tax law).