Anyone that regular follows the news and arguments in Washington about taxes knows that capital gains are taxable to one extent or another because the capital gains tax has been the subject of a great deal of vigorous debate in Congress and between the political parties. As such a contentious tax, it is frequently changed or modifies by Congress. For example, for 2008 through 2010, at least some net capital gains will not be taxed if they would otherwise be taxed at lower rates than the standard 15 percent that is the usual for capital gains taxation. The rules change a lot, so people with significant capital gains (or capital losses) should consult with a tax professional.

Generally speaking, almost everything that is purchased for personal or investment purposes is considered a capital asset by the Internal Revenue Service (IRS). When these assets are sold, the difference between the base value or price of the asset and the actual amount realized in the sale is either a capital gain or a capital loss. If the amount realized was above the basis value, then it was a gain; if it was below the basis price, it was a capital loss. Capital gains are generally taxed at around 15 percent, but as noted previously, this changes a lot each year depending on the political wrangling in Washington. Capital losses are also at least partially deductible, again depending on a myriad of factors related to the asset and the sale.

The extremely simplified definition provided above notwithstanding, capital gains and losses are an extremely complex tax matter, explained in detail in IRS Publication 550, which for 2009 runs to more than eighty pages. There is an endless array of exceptions and exemptions based on the nature of the asset, the nature or timing of the buying or selling of the asset, how long the asset was held, where the asset was sold and the amounts realized from the sale. Even fairly simple capital gains or losses – like those related to a personal home – can become extremely convoluted since there are all kinds of incentives and disincentives related to home ownership as well.

Capital gains or losses are reported on Schedule D of the 1040 form used for filing a individual tax return. Discarding IRS Publication 550, just the line-by-line instructions for Schedule D run to ten pages and include four different worksheets which are used to calculate amounts to be reported. Bear in mind that all of the amounts used to do this also have to be documented so that the numbers claimed can be substantiated if requested by the IRS. Further, this document is full of sentences that are barely comprehensible to most people, like: “Figure the amount of gain treated as unrecaptured section 1250 gain for installment payments received in 2009 as the smaller of (a) the amount from line 26 or line 37 of your 2009 Form 6252, whichever applies, or (b) the amount of unrecaptured section 1250 gain remaining to be reported.” [Instructions for Schedule D 2009, PDF Page 9]

Needless to say, non-experts may find it well worth the extra expense to hire a tax professional to help with detailed capital gains/losses filing. Not only is it complicated and time consuming, but mistakes can be very costly.

The American tax code is an extremely complex body of laws and regulations that really requires a degree of expertise to get the most out of the opportunities contained within it. Of course people with very simple tax situations do not necessarily need professional assistance, but then again their ability to maximize their refunds or minimize their liabilities is also very limited. For people with more complicated tax situations, there are a lot of options available to get the most from their annual tax filing.

After the adjustments – or amounts deducted from the gross income in order to give an adjusted gross income (AGI) – the next step is to determine which deductions to claim. Deductions are amounts that are subtracted from the amount due on each person’s tax return. Like everything else related to the American tax system, deductions can be complicated and tricky and claiming deductions that you are not entitled to can be costly if the problem is caught by the Internal Revenue Service (IRS). Therefore it really pays to understand the deductions, how they work, and if the qualifying conditions are met.

The first choice the taxpayer is confronted with is whether to claim the Standard Deduction or if it is more beneficial to itemize deductions. The Standard deduction is much simpler to file for and requires only basic documentation to substantiate if audited by the IRS. Itemized deductions offer a lot more opportunities to save money, but are also more time consuming and demand copious documentation in order to substantiate the claim. The proper way to determine the right option is to work out the total deduction amount available using both the Standard Deduction and itemized and then choosing the appropriate one. However, this is twice as time consuming, so many individuals just opt to take the Standard Deduction and be done with it.

People that have extremely complicated tax situations – high income, multiple financial investments, real estate, and so on – can frequently benefit by itemizing, but few choose to do the work themselves, instead hiring an expert to do it. Similarly, self-employed people, businesses, and other entities usually opt to itemize since there are many deductions that are only available through itemization. One of the consequences of the American tax system being progressive is that it is specifically designed to encourage specific behaviors and investments, and especially things related to small business and entrepreneurship. Therefore, people engaged in such activity should probably itemize, though they should also use the services of a professional to do so.

The real danger of maximizing deductions is that it is very easy to misunderstand or misread how the deduction works, resulting in an erroneous claim. Further, the IRS generally begins with the assumption that all errors are deliberate and thus subject to penalties and interest. The IRS uses a lot of terminology that can be tricky because the strict IRS definition of these common terms is not the same as the popular understanding. For example, the idea of a “business expense” appears fairly straight forward and most people believe they can determine what is – or is not – a ‘business expense.” However, the IRS has a very strict and well documented definition of what constitutes a “business expense” that may not be the same as the common sense definition of the term. Further, not all “business expenses” – as defined by the IRS – are treated the same and can be claimed the same way, so there is a lot of room for error.

One of the most daunting aspects of the American tax system is just the simple fact that it changes each year. Some of these changes are built into the legislation that enacted the measure, which is why many limits and income restrictions change every year. Other changes stem from the fact that the progressive tax system used by the United States is specifically designed to perform more functions than merely raising revenue for the federal government. Instead, it is used to promote activity that the political leadership views as desirable, discourage activity that it does not like and to mitigate the effects of various economic problems and trends in society. This last purpose means that in times of economic distress or turmoil, there are often a lot more changes than happen when things are running smoothly and that has certainly been the case over the last few years.

In an effort to stimulate the overall economy, as well help particular sectors that have been hard hit in the recent downturn, there are a lot of tax changes that have been implemented for 2009 and 2010 that taxpayers should be familiar with. If the taxpayer is using a professional tax preparation service, the service should be aware of all of the new changes, but otherwise it is up to the taxpayer to find out about them. Though some of the new measures are relatively minor and not worth the trouble for many taxpayers, other measures can result in real savings for many average people and should be used.

For example, the American Recovery and Reinvestment Act of 2009 (ARRA) is part of the overall stimulus program being implemented by the federal government to help mitigate the effects of the ongoing recession. This act provides a number of tax breaks that apply to people who are buying homes, people that have purchased new cars, people that have made their homes more energy efficient, people paying for higher education as well as people that have recently become unemployed and used unemployment compensation. The exact details of these various programs can be found on the website of the Internal Revenue Service (www.irs.gov) and elsewhere online.

Another example of recent changes that many common people can benefit from are the increased amounts being offered for standard deductions. This is a real plus for people that do not regularly itemize their deductions, but do claim standard ones as appropriate. The basic deduction amounts have increased for married couples filing jointly, singles, and heads of household. Similarly, a new standard deduction has been introduced for state and local sales taxes and excise taxes paid during the purchase of a new vehicle after February 16, 2009. The standard deduction for state and local real estate taxes has also been increased in 2009.

The ARRA also included the Making Work Pay tax credit which is likely to have a profound effect on many people’s taxes because it lowered the amount of withholding held by employers. The basic idea was to permit workers to receive more of their wages immediately as opposed to waiting for their refunds. However, this also means that some people that usually receive refunds may not for 2009, or people that usually owe may owe more than normal this year.

The American tax code is extremely complicated, and though this means that it can be a pain to file your annual return, it also means that there are a lot of ways to either increase the amount of your refund or decrease the amount of your tax liability. Despite this, most people are aware of at least some of the basic deductions and credits they can claim, such as dependents and certain tax credits like the Earned Income Tax Credit (EITC). Nevertheless, there are a number of deductions that can save a lot of money that some people may overlook, some of which do not involve itemizing your deductions.

If there is a deduction that can be claimed that does not require one to itemize, they are technically known as adjustments to your income. The amount after these adjustments is known as your adjusted gross income (AGI), which plays a big role in determining what can or cannot be claimed. Adjustments like dependents are well known, but there are some other adjustments that are frequently overlooked. One example of this is contributions to a retirement plan like an IRA, 401(k), or similar plan. Another adjustment that is commonly overlooked is interest on student loans, up to a limit of $2,500 as long as the loan qualifies. There are other adjustments as well, such as capital losses and some business expenses.

The real catch behind many deductions is that in order to claim them, you have to file the “long form” 1040 and itemize all of your deductions on Schedule A. This can be a time consuming and annoying process for many people, so they just opt not to itemize their deductions. Nevertheless, itemization can really make an enormous difference in the amount of money owed, either an IRS refund back to you or as a liability owed by you to the IRS. Either way, itemizing is frequently well worth the additional time and hassle involved, especially if you hire a tax professional to do the hard work on your behalf.

Even when people decide it is worth the effort to itemize their deductions, there are many deductions that are commonly overlooked. Some of the most common deductions over looked include: interest paid on a home mortgage, interest paid on a home equity loan (or second mortgage), state and local taxes or sales taxes, medical expenses, and personal casualty or theft losses (including amounts lost through financial schemes and scams). As is usually the case with anything done by the IRS, there are many restrictions and strict guidelines that have to be followed in order to claim these deduction legally, so if you are not using professional services, you should take the time to carefully read IRS Publication 17, which describes most of these matters in good details and tells taxpayers where to look for more detailed information.

There are many tax breaks – adjustments, deductions, and credits – that can be claimed, so there are many potential tax breaks to be found. The real issue is determining which ones you qualify for and being careful to claim them correctly. Remember that you are liable for any mistakes on your return, so it is in your best interest to pay close attention to what you claim.

Like it or not, the American tax system is extremely complex. The tax code alone runs to many thousands of pages and the additional regulations run to many more thousands of pages. The result is one of the most complicated tax systems in the world and many people spend their entire professional careers learning how to handle different aspects of the tax code and selling this expertise to people that have neither the time nor the interest to become experts themselves. Of course anyone is allowed to fill out their own tax returns, and if the person’s tax situation is very simple – people that qualify to use the 1040EZ and choose to do so – there is generally no harm in this.

However, the more complicated the tax situation becomes; the more important it is to at least consider hiring a professional. Many people end up getting themselves into trouble with the Internal Revenue Service (IRS) simply because they decide to file their own returns without understanding how everything actually works. For example, many deductions have relatively self-explanatory names – like “business expenses” – but these terms have very strict and well defined meanings in respect to taxes which may not include everything that common sense says is a “business expense.” Further, many deductions have very specific limitation on what can or cannot be claimed, and while an expert may know and understand what these limits are, a layman may not. In either case, if a person claims a deduction or credit that they are not entitled to, they may face penalties and other punitive measures.

Another reason that an expert may be useful is because the tax code and various limits and conditions change each year. For example, just because a person qualified for a particular deduction in one year does not mean they qualify for the same deduction the next year. Similarly, there are also usually a number of one time, or temporary, deductions or credits that only apply once. There are so many changes that many major tax forms change each year, so the IRS usually only issues the tax forms for a particular year a few months in advance of the April 15 due date. Keeping track of all of these changes and modified limits can be very time consuming, but most experts do this as a matter of course, so it is no problem for them.

Finally there is simply the matter of maximizing the tax benefits: maximizing the amount of a refund or minimizing the amount owed to the IRS. The whole notion of deductions and tax credits is very complicated. There are so many options available and each of them has very strict guidelines that have to be met in order to claim them. This is true even for basic claims that people think they understand – like dependents – even if in reality they do not understand specifically what the IRS means by these terms. The result is that in many cases a tax professional can not only help the taxpayer avoid getting themselves in trouble, but can also help them get a better return than they would have been able to come up with by themselves.

One of the defining characteristics of the American tax code is that it is used for more than merely raising government revenue. Instead, the progressive tax system is also used to encourage behavior deemed socially beneficial, discourage behavior considered socially undesirable and to remedy or relieve temporary economic difficulties. The homebuyer tax credits fall into the latter category, being specifically designed to help ease the collapse of the real estate market that began in late 2007 and has continued ever since. The basic idea was to use the tax code in order to provide prospective homebuyers with a good incentive to buy new homes despite the collapse of the residential real estate market.

The first measure was passed in 2008 in the form of the Housing and Economic Recovery Act, which offered a tax credit of up to $7,500 for first time homebuyers. The tax credit was not an actual grant of money, but instead operated like an interest-free loan that would have to be repaid through the tax system gradually over the subsequent fifteen years. This original plan only applied to homes purchased between April 8, 2008 and January 1, 2009 and had to be claimed by filing the new Form 5405 that was created specifically for this purpose. The problem was that during the period covered by this law, residential real estate markets were in free fall all across the country with properties losing value on a monthly basis. Further, in the wake of the subprime mortgage crisis, most lenders tightened up their lending standards dramatically resulting in the credit crunch. The result was that this initial measure only met with limited success.

The limited success of this original plan resulted in it being substantially expanded through the Worker, Homeownership and Business Assistance Act of 2009. This act expanded the time frame (up through April of 2010), increased the credit amounts, and – perhaps most importantly – extended the tax credit to people that already owned homes, removing the “first time” requirement that was part of the original measure. This extension of the plan to people that already owned homes was essential to the measure’s success since by the latter part of 2008 the only people that had enough collateral and good enough credit to get a new mortgage loan were the same that had already owned homes and had equity in them.

As is the case with most tax credits and other incentive programs administered through the tax code, there are a number of conditions that have to be met in order to qualify. For example, the property in question has to be the taxpayer’s primary residence, so people buying rental properties cannot claim the credit. All the specific details can be found by looking for the “First-time Homebuyer’s Credit” on the IRS website: www.irs.gov.

The substantial amount of the tax credit, despite the fact that it has to be paid back, has made the measure very popular and some lenders will even accept the credit as a down payment of the new mortgage. Further, since the time period has been expanded, most housing markets have already bottomed out, meaning that buyers are much more willing to buy new homes. Finally, the credit crunch is also starting to relax some, meaning that mortgages are gradually getting easier to get. The result is that the extended and improved tax credit is likely to be much more successful than the 2008 measure.

The 1099 series of forms are known as “information returns” and required by the Internal Revenue Service (IRS) to be issued by almost all non-employer payers – people, organizations, or institutions that pay money to American taxpayers – in the United States. These information returns show the amount of money paid to the taxpayer as well as other relevant information related to the payments, such as withheld amounts and other details. The information on the 1099 is then entered on the taxpayer’s personal or business income tax return to document the amount of money earned through these alternative income methods. Basic wages, salaries, and tips are not reported on 1099 forms, but on employer issued W-2 forms. Every 1099 is issued in triplicate, with one copy being held by the payer, one copy being filed directly with the IRS and one copy being sent to the person that received the payment.

There are almost twenty different types of 1099 forms that are issued for different types of income, as well as a number of other forms that are also used to report certain payments though they are not 1099s. Some forms of 1099 are much more common than others. For example, a 1099R reports income earned in various retirement plans and arrangements like IRS, 401(k)s, and various qualified plans and are therefore received annually by anyone with some sort of retirement plan. On the opposite end of the spectrum, the 1099OID is fairly uncommon and relates to money earned by purchasing bonds at a rate lower than their eventual redemption value, a rather complex taxable amount that only really applies to people with complex investment structures.

In general, most 1009s are issued by financial institutions, investment firms, and brokerages, though there may be occasions when individuals are required to issue 1099 forms. For example, if a person uses a contractor and pays him or her and the amount exceeds $600, that person has to issue a 1099MISC (miscellaneous), to that contractor for the amount paid. Frequently landscaping and other household maintenance and improvement workers operate as independent contractors, in which case the customer has to issue a 1099-MISC for the amount paid to that contractor. More often than not, if a contractor requires a 1099MISC they will notify the client of this fact in advance and show them how to proceed. However, if this is not the case, the client can find all of the relevant information on the IRS website: www.irs.gov.

Since a copy of every 1099 is sent directly to the IRS, these documents play a key role in determining whether or not the taxpayer is reporting everything earned properly or not. When an audit is initiated, the IRS will compare all of the taxpayers 1099s to all of the amounts claimed on their return. If there is a disparity – either more or less money reported on 1099s than claimed on the individual return – then the taxpayer is usually in trouble. For this reason it is important to ensure that all 1099s owed are duly issued before the end of the calendar year. If a person is expecting a 1099 and does not receive one, it is very much in their best interest to contact the payer to ensure that the 1099 was issued and to request a copy of it.

Few things in American society are as dreaded as being audited by the Internal Revenue Service (IRS). The tax code is so complex, it is almost a given that if the auditors dig deep enough and look hard enough eventually they will find mistakes and then charge all the relevant penalties (and interest for older errors). The general process is that the IRS computers compare your newest return to your previous returns and the differences are calculated providing a “DIF Score”. If this score is high, indicating a significant change in your filing, it means your return is given additional attention and perhaps audited. Although the DIF Score factors used to determine who gets audited and who does not is kept secret, there are certainly things that will make it more likely that you will be audited. Further, there are specific things you can do to lower your chances of being audited.

First and foremost, use your common sense when filing your annual tax return. If something seems too good to be true, it probably is. So just because you have recently opened a home office does not mean you can suddenly claim your mortgage payments for the year or the total value of your home as a business deduction. People making large and unusual claims on their taxes are automatically highlighted for closer scrutiny, so if you do make a large and unusual deduction or claim for a tax credit on your return, be very sure well in advance that it is legitimate. If you are unsure about a possible deduction or tax credit, read up or consult an expert before you claim it.

Fair or not, there are certain categories of taxpayers that are almost always more likely to face an audit than other people. One of these groups are people that earn more than $100,000 per year because the penalties and interest received from people with high incomes is much more likely to justify the IRS expense in auditing the person. Another group are people that are self-employed because they have much more leeway to hide income or claim illegal deductions by treating personal expenses as business ones. People that earn a lot of their income from cash transactions – like professional gamblers, doctors, and servers – are also more likely to be audited since they have better opportunities to under report their actual earnings. People in any of these groups are more likely to be audited, but people in more than one of these categories at the same time are almost guaranteed to be audited.

Of the 1.39 million audits conducted in 2008, only 310,429 were full field audits. Most audits do not require calling in the person, but instead are handled through correspondence. This means that if you are identified as someone that the IRS intends to scrutinize more closely, if you have all of your documentation on hand to substantiate your claims, you may be able to resolve the issue without going through a full, in person, audit process. Needless to say, you should be able to substantiate any deduction or tax credit claimed, so if you have the supporting documentation readily available and provide it to the IRS when they ask for it through the mail, you can avoid having to deal with the more intense scrutiny stemming from a full audit.

Despite DIF scores and other “red flags” that make audits more likely, there is also a large portion of audit targets that are generated at random, simply to keep everyone alert to the possibility. Since the process is random, there is no possible way to avoid an audit if your number comes up in this way, so no amount of pre-emptive measures are guaranteed to make sure your are not audited.

Technically speaking, there is no specific age or time period that determines when a person must stop claiming a child as a dependent. In fact, even the elderly can be claimed as dependents as “qualifying relatives” regardless of their age. However, the determination of who can be claimed as a dependent is fairly complex. There are a number of basic terms and conditions as well as a series of tests that each potential dependent has to pass before they can legitimately be claimed as dependents, although age is not – in of itself – a major determining factor.

First there are a series of conditions that must be met before anyone can be claimed as a dependent, either as a “qualifying child” or a “qualifying relative”. These are: (a) no taxpayer can claim a dependent if he or she (or their spouse if filing jointly) can be claimed as a dependent of another taxpayer; (b) a taxpayer cannot usually claim a married person who files jointly as a dependent, though there are a couple of exceptions to this rule; (c) a dependent has to be either a U.S. citizen, resident alien, national or a resident of Canada or Mexico; (d) any dependent has to qualify as the taxpayer’s “qualifying child” or “qualifying relative”. Assuming each of these initial conditions are met, then the potential dependent has to pass a series of additional requirements.

To meet the requirements of being a “qualifying child” the child has to: (a) be the taxpayer’s child, step child, foster child, sibling, half sibling, stepsibling or a the descendent of any of these; (b) the child has to be either nineteen years old and younger than the taxpayer, twenty-four years old if they are also a full time student, or can be any age if the child is permanently and completely disabled; (c) the child has to have lived with the taxpayer for at least half the year being filed for; (d) the child cannot have provided for more than half of their own support during the tax year; (e) the child is not filing a joint return on his or her on behalf (with exceptions); and (f) if the child can be claimed as a dependent by another taxpayer, the person claiming has to be the one allowed to do so.

The requirements for a “qualifying relative” are a bit different. These include: (a) the person cannot be the “qualifying child” to either the taxpayer or anyone else; (b) either the person has to be related to the taxpayer as defined by the IRS or the person has to live as a regular full-time member of the taxpayer’s household in a legal living arrangement; (c) the person’s gross annual income cannot exceed $3,650, though there are exceptions for people receiving disability payments; and (d) the taxpayer has to cover at least half of the person’s annual living expenses throughout the tax year in question, though again there are some exceptions depending on circumstances.

The exact rules and guidelines are more complex and explained in detail in IRS Publication 501. As long as your child meets all of the appropriate conditions outlined above, the child can be claimed as a dependent. Noting that many of these terms and conditions may change over the course of a year, the dependent should be retested each tax year in order to guarantee that they still qualify as either a “qualifying child” or “qualifying relative”.

The Earned Income credit (EIC), or more properly the Earned Income Tax Credit (EITC), is a refundable tax credit that is available to many lower income tax payers based on a means test. Since enacted in 1975, the EIC has evolved into a much larger tax credit than originally envisioned and one of the most successful federal programs to assist low income people. In fact, the idea of the EIC has been so successful that today many American states have their own EIC programs for state taxpayers as well. The EIC was specifically designed to offset the burden of payroll tax deductions and to actively encourage people to work, which is why it only applies to people that earn income. Contrary to the conventional wisdom about the EIC, it is available to people with or without children, though workers without children receive lower benefits and have to meet some additional conditions in order to qualify.

There are a number of personal information requirement that are necessary to qualify for the EIC before the means test is applied. These include: (a) the taxpayer must be a U.S. citizen, full time resident alien, or a non-resident alien married to an American citizen; (b) the taxpayer has to have a valid Social Security Number (SSN); (c) the taxpayer cannot be filing as “married, filing separately”; (d) the taxpayer has to have earned some income through employment, self-employment, or some other recognized sources; (e) the taxpayer cannot be the qualifying child of another person; and (f) the taxpayer cannot file Form 2555 or 2555-EZ related to earning foreign income. If the taxpayer meets these initial conditions, then the means test is administered.

The means test looks at both the level of earned income as well as the amount of investment income earned by the taxpayer. The exact amounts differ each year, but the IRS posts regular limits tables on its website allowing the taxpayer or his or her tax preparer to see what the relevant limits are for any given tax year. The income limits are based on the taxpayer’s adjusted gross income (AGI) and the annual limits change depending on how the taxpayer chooses to file. For example, people that are filing as “married, filing jointly” typically get higher limits than those filing otherwise. Further, the limits also vary depending on the number of qualifying children the taxpayer is claiming. Every year there are also caps, that limit the upper amount that can ever be claimed as EIC regardless of the other factors, but these caps also differ depending on the filing status and number of qualifying children.

The EIC can also be paid, at least in part, in advance by employers if they are so inclined. This is a popular option for low income workers since they receive their EIC in the form of larger regular paychecks as opposed to in one lump sum each year. As is the case with most matters related to tax matters, the payment of advance EIC credit is also carefully regulated. For example, regardless of the EIC that a particular worker may qualify for, in 2009 the absolute maximum advance EIC that can be received from employers is $1,826. There are also regular changes and adjustments made almost every year for one purpose or another. As an example of this, the American Recovery and Reinvestment Act (ARRA) provides a temporary increase in the amount of EIC available to some recipients that only applies for 2009 and 2010 as part of the national stimulus and recovery process.