Recently, President Obama has been talking about another mortgage help program for struggling homeowners. Now he has released his proposal, which is an expansion on the already existing HARP (Home Affordable Refinance Program).

Outlined below are the main points of the new HARP plan (based on The White House’s Fact Sheet).

Broad-Based Refinancing Plan

• Provides non-GSE borrowers access to simple, low-cost refinancing
-     You must be current on your mortgage and meet a minimum credit score
-     Your loan must be no larger than the current FHA conforming loan limits in your area
-     The loan you are refinancing is for a single-family, owner-occupied principal residence

• This plan will be paid for by a portion of a proposed fee on large financial institutions

• Streamlined refinancing for all GSE borrowers
-    Eliminates appraisal costs for all borrowers
-    Increases competition so borrowers get the best possible deal
-    Extends streamlined refinancing for all GSE borrowers

• Gives borrowers the chance to rebuild equity in their homes through refinancing

• Designed to provide streamlined refinancing for rural America

• Streamlined refinancing for FHA borrowers

Homeowner Bill of Rights
• Simple, easy to understand mortgage forms
• No hidden fees and penalties
• No conflicts of interest
• Assistance for “at-risk” homeowners
• Safeguards against inappropriate foreclosure

Pilot Sale of Foreclosed Properties
• Announcement of the initial pilot sale to transition Real Estate Owned (REO) property into rental housing to stabilize neighborhoods and improve housing prices

A Year of Forbearance for the Unemployed
• 12-month forbearance for mortgages owned by the GSE’s (Fannie Mae and Freddie Mac)
• Move by major servicers to use 12-month forbearance as a default approach, becoming the new industry norm

Investigations into Mortgage Servicing Abuses
• The Department of Justice, the Department of Housing and Urban Development, the Securities and Exchange Commission, and state Attorneys General have formed a “Residential Mortgage-Backed Securities Working Group” under President Obama’s Financial Fraud Enforcement Task Force

Project Rebuild
• Putting people back to work rehabilitating homes, businesses and communities

HAMP (Home Affordable Mortgage Program)
•Expanding HAMP eligibility to reduce additional foreclosures and help stabilize neighborhoods

For more information about the new HARP program, please see the following articles:

• www.bizjournals.com/phoenix/blog/business/2012/02/obama-announces-new-harp-plans.html

• www.mnn.com/money/personal-finance/blogs/obama-announces-new-plan-to-combat-housing-crisis

• www.upi.com/Business_News/Real-Estate/2012/01/25/Obama-HARP-Expansion-Builds-on-New-Refi-Momentum/9171327502942/

• www.huliq.com/4745/obama-unveils-new-federal-proposal-help-bolster-housing-market

• www.washingtonpost.com/blogs/ezra-klein/post/experts-react-to-obamas-new-housing-plan/2012/02/02/gIQAR3OmkQ_blog.html

• www.pe.com/incoming/20111111-21-facts-about-new-harp-program.ece

The IRS grants tax extensions by submitting Form 4868. FileLater.com offers an simple online application for submitting this form electronically.

FileLater.com features:

•  All 1040 Personal Federal Returns
• Sole Proprietorships (Schedule C)
• Single Member LLCs
• E-file IRS Form 4868

How It Works:

Step 1

The IRS requires that you provide some personal information in order to request a tax extension online. This includes your name, address, Social Security Number (or ITIN) ― and the same information for your spouse if you are married filing jointly. Tax forms (including W-2s, 1099s, and prior year returns) are not required to get a tax extension. Additionally, you can be confident that all of your data is kept secure and shared only with the IRS.
Step 2

In order to get a tax extension, you must estimate whether you expect to owe taxes or get a tax refund. Don’t worry, this isn’t as complicated as it may sound. You can use FileLater’s helpful tax calculator to estimate your situation. Note that many taxpayers simply assume a similar tax situation to the previous year. If you expect to owe any tax, you will want to make a payment to avoid potential interest and late payment penalties assessed by the IRS. FileLater can also help you make a payment directly to the IRS via Electronic Funds Withdrawal (EFT) directly from your bank account.

Step 3

Once you submit your tax extension using FileLater, the system will immediately electronically file (e-file) Tax Form 4868 to the IRS for approval. Note that FileLater is an authorized IRS e-file provider, which means that your transaction and your information are completely secure.

That’s All It Takes

A few days after you submit your tax extension request, FileLater will send you a confirmation email notifying that your tax extension (Form 4868) has been approved by the IRS. If, for any reason, your tax extension request is denied, FileLater will tell you why ― and you can resubmit for free after making the necessary changes. Keep in mind, nearly all rejections are caused by mistakes (misspellings or Social Security Numbers that don’t match IRS records). As long as you submit your information accurately and on-time, your tax extension will likely be approved ― which is why the IRS calls it an “automatic extension.”

Submit an extension at FileLater.com

You are required to file a federal income tax return if your income is above a certain level, which varies based on your filing status and age, as well as the type of income that you receive.

For the year 2011, the following individuals must file a Federal income tax return:

• If your filing status is SINGLE and at the end of 2011 you were UNDER AGE 65, then you must file a return if your GROSS INCOME was at least $9,500.

• If your filing status is SINGLE and at the end of 2011 you were AGE 65 OR OLDER, then you must file a return if your GROSS INCOME was at least $10,950.

• If your filing status is MARRIED FILING JOINTLY and at the end of 2011 BOTH SPOUSES were UNDER AGE 65, then you must file a return if your GROSS INCOME was at least $19,000.

• If your filing status is MARRIED FILING JOINTLY and at the end of 2011 ONE SPOUSE was AGE 65 OR OLDER, then you must file a return if your GROSS INCOME was at least $20,150.

• If your filing status is MARRIED FILING JOINTLY and at the end of 2011 BOTH SPOUSES were AGE 65 OR OLDER, then you must file a return if your GROSS INCOME was at least $21,300.

• If your filing status is MARRIED FILING SEPARATELY and at the end of 2011 your were ANY AGE, then you must file a return if your GROSS INCOME was at least $3,700.

• If your filing status is HEAD OF HOUSEHOLD and at the end of 2011 you were UNDER AGE 65, then you must file a return if your GROSS INCOME was at least $12,200.

• If your filing status is HEAD OF HOUSEHOLD and at the end of 2011 you were AGE 65 OR OLDER, then you must file a return if your GROSS INCOME was at least $13,650.

• If your filing status is QUALIFYING WIDOW(ER) WITH DEPENDENT CHILD and at the end of 2011 you were UNDER AGE 65, then you must file a return if your GROSS INCOME was at least $15,300.

• If your filing status is QUALIFYING WIDOW(ER) WITH DEPENDENT CHILD and at the end of 2011 you were AGE 65 OR OLDER, then you must file a return if your GROSS INCOME was at least $16,450.

According to the IRS, you will most likely need to file a federal income tax return if you answer “yes” to any of the following questions:

• Did you have Federal taxes withheld from your pension and wages for this tax year and wish to get a refund back?
• Are you entitled to the Earned Income Tax Credit or did you receive Advance Earned Income Credit for this tax year?
• Were you self-employed with earnings of more than $400.00?
• Did you sell your home?
• Will you owe any special tax on a qualified retirement plan (including an individual retirement account (IRA) or medical savings account (MSA)? You may owe tax if you:
• -    Received an early distribution from a qualified plan
• -    Made excess contributions to your IRA or MSA
• -    Were born before July 1, 1940, and you did not take the minimum required distribution from your qualified retirement plan
• -    Received a distribution in the excess of $160,000 from a qualified retirement plan
• Will you owe social security and Medicare tax on tips you did not report to your employer?
• Will you owe uncollected social security and Medicare or Railroad retirement (RRTA) tax on tips you reported to your employer?
• Will you be subject to Alternative Minimum Tax (AMT)? (The tax law gives special treatment to some kinds of income and allows special deductions and credit for some kinds of expenses.)
• Will you owe recapture tax?
• Are you a church employee with income in wages of $108.28 or more from a church or qualified church-controlled organization that is exempt from employer social security or Medicare taxes?

For more information about your federal income tax, please see IRS Publication 17, titled Tax Guide 2011.

Taxable income, generally speaking, is the gross income of an individual or corporation, less any allowable tax deductions. Your taxable income is, in other words, the amount of your income that is subject to income tax.

In the USA, what qualifies as “taxable income” is defined in the Internal Revenue Code Section 63.  “Gross income” is defined in Section 61 of the Internal Revenue Code.

Taxable income can encompass more than just your annual salary.  Taxable income can include profits from stocks or real estate sales, winnings from the lottery, betting the dogs or horses, and winnings from any casino (domestic or abroad). Even the cash value of bartered items is considered taxable income.

Income that may be part of your gross income but is not identified as taxable income would include child support, proceeds from life insurance policies, inheritances, Workers Compensation payments, Welfare benefits, compensation awarded as a result of physical injury, education scholarships or grants, and income paid to your retirement account (either a 401k or IRA, up to a certain amount).

From your gross income, allowable tax deductions as defined in Section 63 ― Subsection (a) covers itemized deductions; and subsection (b) covers standard deductions.  Note that you cannot reduce your taxable income with standard deductions if you itemize your deductions.

Itemized deductions that can minimize your taxable income include medical expenses and health insurance, as well as the cost of prescriptions, and the mileage to/from your doctors appointments.  Itemized deductions also include mortgage interest paid on a home loan, personal losses due to theft or accident, state and local income or sales taxes, property taxes (on real estate as well as personal property), charitable contributions to churches and other qualified nonprofit organizations, gambling losses  (provided they are offset by gambling winnings), and home office expenses.

The standard deduction to reduce your taxable income will be based on your filing status and changes from year to year, depending on inflation.  There is a higher standard deduction for individuals who are blind, and those aged 65 or older.  In addition to the standard deduction, you may claim deductions for real estate taxes, (net) loss sustained as a result of a Federally Declared Disaster, and taxes on federally-sponsored programs (which may include energy-efficient vehicle purchases, appliances, etc.).

In summary, taxable income is that portion of your gross income which is subject to taxation by the governing authority, less any allowable itemized or standardized deductions.

Types of Income Subject to Tax

The following categories represent types of income, which may be subject to Federal/State income tax, as set forth by the IRS:

• Wages and salaries
• Tip income
• Interest received
• Dividends
• Business income
• Capital gains and losses
• Pensions and annuities
• Lump-sum distributions
• Rollovers from retirement plans
• Rental income and expenses
• Farming and fishing income
• Earning for Clergy
• Unemployment compensation
• Gambling income and losses
• Bartering income
• Scholarship and Fellowship grants
• Social Security and equivalent Railroad Retirement Benefits
• 401(k) plans
• Passive activities (losses and credits)
• Stock options
• Exchange of Policyholder Interest for stock
• Canceled debt
• Alimony and child support

For a complete list of the types of income subject to tax, see the IRS Publication 525 (Taxable and Nontaxable Income).

Income That Is Taxable

Wages, Salaries, and Other Job-Related Earnings ― This may include advance commissions, back pays, bonuses, awards, cash gifts from your employer, fringe benefits, unemployment compensation, and childcare services.

Taxable Interest Income ― According to the IRS, taxable interest is defined as “any interest you receive that is credited to your account and can be withdrawn.” This may include interest from bank accounts, investment accounts, time deposits, loans you made to others, savings bonds, and debt instruments sold at a discount.

Miscellaneous Income ― This may include income from bartering, canceled debts, life insurance proceeds, survivor benefits, recoveries, welfare, and other public assistance benefits.

Other types of taxable income may include: investment dividends income, interest on bonds, alimony, unemployment benefits, Social Security benefits, retirement plan distributions, jury pay, election worker pay, rental income, royalties, notary fees, and certain scholarships, fellowships, and grants.

Income That Is NOT Taxable

Types of income that are not subject to Federal tax may include the following:

• Gifts and inheritances
• Life insurance proceeds
• Child support
• Certain Veteran’s benefits
• Insurance reimbursements for medical expenses not previously deducted
• Some welfare payments
• Compensatory damages for personal physical injury or illness
• Workers’ compensation
• Some qualified pension distributions for Public Safety Officers

For more information, please see IRS Publication 525, Taxable and Nontaxable Income.

Self-Employment Income

Self-employment tax (also called “SE tax”) is a Social Security and Medicare tax aimed mainly at individuals who are self-employed. The SE tax payments you make go towards your coverage under the federal Social Security system.  Social Security coverage essentially provides retirement benefits, disability benefits, health care benefits (Medicare), and survivor benefits.

In general, you must pay Self-Employment Tax and file “Schedule SE” (on Form 1040) if either of the following applies:

• Your net earnings from self-employment income were $400 or more
• You work for a qualified church-controlled organization (other than as a minister or member of a religious order) that has elected an exemption from Social Security and Medicare taxes. In this case, you are subject to SE Tax if you earn $108.28 or more in wages from the church/organization.

To pay self-employment tax, you must have a Social Security number (SSN) or an individual taxpayer identification number (ITIN).

Note that there are special rules for fishing crew members, notary public employees, aliens, state or local government employees, foreign government employees, and international organization employees.

You should also note that whenever SE tax is mentioned, it generally only refers to Social Security and Medicare taxes, and does not include any other taxes that self-employed individuals may be subject to. Keep in mind that other information may be required for your particular type of business.

You may deduct ½ of your self-employment tax as an adjustment to your income on Tax Form 1040. Keep in mind that the Social Security Administration (SSA) places a time cap on how long you have to report self-employment income, and you can typically only get credit for self-employment income that is reported within 3 years, 3 months and 15 days after the tax year during which you earned the income.

Self-Employment Tax Rate

The SE tax rate for calendar year 2010 is 15.3% — which breaks down to12.4% for Social Security (old age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance). The SE tax rate for calendar year 2011 is 13.3% — which breaks down to 10.4% for Social Security and 2.9% for Medicare. Note that the Tax Relief Act of 2011 decreased the self-employment tax rate by 2% for self-employment income that was earned in 2011.

All of your combined earnings in the current year may be subject to any combination of Social Security tax, Medicare tax (2.9%), or railroad retirement tax (tier 1).

For tax years 2010 and 2011, the first $106,800 of your combined earnings may be subject to a combination of railroad retirement tax (tier 1), Social Security tax, and the Social Security part of self-employment tax. Any income you earn over $106,800 will not be subject to the Social Security tax.

If your wages (including tips) are subject to Social Security tax and/or railroad retirement tax (tier 1), and your wages are at least $106,800, you may not be subject to the Social Security part of the self-employment tax on any of your net earnings. Regardless, you must still pay the Medicare part (2.9%) of the self-employment tax on all of your net earnings.

If you do not file based on the calendar year, note that you must use the tax rate and earnings limit that is effective at the beginning of your tax year. Even if the tax rate and/or earnings limit changes during the year, you must continue to use the same rate and limit throughout your entire tax year.

Bear in mind, the self-employment tax rules above will apply regardless of your age – even if you have already begun receiving Social Security or Medicare benefits.

For more information, please refer to the IRS Publication 533 (Self-Employment Tax).

PAYROLL TAXES

The term “payroll tax” can be used to describe two different types of similar taxes. The first type, known as withholding tax, is withheld from an employee’s wages by their employer. The employer then sends the withheld amount to the appropriate taxing authority. It is also referred to as a “pay-as-you-earn” tax.

The second type of payroll tax is paid by the employer, from his/her own funds. The amount of payroll tax that an employer owes depends on the jurisdiction, and may be fixed or proportional to the employee’s salary.

Employers withhold payroll taxes (and income taxes) from their employee’s wages. Payroll taxes are then collected by both federal and state governments, which use the revenues to fund programs such as Social Security, Medicare, unemployment compensation, and worker’s compensation.

WITHHOLDING TAX

Withholding tax (also known as “payroll withholding”) is essentially income tax that is withheld from your wages and sent directly to the IRS by your employer. In other words, it’s like a credit against the income taxes that you must pay for the year.

By subtracting this money from each paycheck that you receive, the IRS is basically withholding your anticipated tax payment as you earn it.

Managing Your Withholding Tax

In general, the more money that is withheld from your wages throughout the year, the greater your tax refund may be because you’ve essentially overpaid the IRS. While everyone likes to get a tax refund, you should keep in mind that you’re only getting back the money you earned that year. A tax refund is basically an interest-free loan that you gave to the IRS!

On the other hand, if too little is withheld from your wages, you will likely owe more tax at the end of the year because you have underpaid the IRS. Additionally, you may be subject to penalties and interest charges for under-withholding.

For most taxpayers, it’s recommended that you try to match your withholding tax as close to your actual tax liability as possible. While you cannot avoid withholding tax altogether, you can control the amount that is withheld from each paycheck when you fill out your W-4 form.

Tax Form W-4 (Employee’s Withholding Allowance Certificate)

The purpose of Tax Form W-4 is simple ― it is used by your employer to withhold the proper amount of federal income tax from your paycheck. The IRS recommends that employees submit a new W-4 tax form each year, or any time their personal or financial situation changes. Of course, this is required upon beginning any new job.

Completing Tax Form W-4 may be easier than you think. The steps for filling out your W-4 are as follows:

Step 1: Get a copy of Tax Form W-4 from your employer, or download it from the IRS website. If you download online, you can fill-in your information before printing and signing.

Step 2: Provide your correct name, address, and Social Security Number. It is essential that this information is 100% accurate.

Step 3: Depending on your marital status and filing status, you will either check the box for “single” or “married.”

Step 4: Do you know how many withholding allowances you should claim? If not, you can use Tax Form W-4 to help calculate this number. In most cases, this is the same as your number of personal exemptions.

NOTE: You do not have to rely on your personal exemptions to determine your withholding allowances. For instance, if you have more than one job, if your spouse works, or if you itemize deductions, you may want to closely calculate your number of allowances to ensure that you are making the right decision.

Step 5: Do you have more than one job? If so, you should claim “0” (zero) for withholding when filling out Tax Form W-4 for your second employer. Just keep in mind that being “exempt” is not the same as claiming zero withholding. When you claim “zero”, the highest possible amount of taxes will be withheld from each of your paychecks.

NOTE: If you decide to claim more than “9” (nine) allowances, your employer will have to send your tax form to the IRS for review.

Step 6: Sign your W-4 tax form to make it valid.

Step 7: Once you give your W-4 form to your employer, they will complete Lines 8, 9, and 10 and complete the process from there.

Whether you are starting a new job or you just want to change your withholding allowances for the year, it is important to become familiar with Tax Form W-4. Every employee must fill out this tax form and submit it to their employer. This way, you will be able to withhold the proper amount of taxes from each paycheck.

Dependents

A dependent is a person (other than the taxpayer themselves or their spouse) for whom the taxpayer can claim a dependency exemption. Each dependency exemption lowers the amount of income that can be taxed. For 2011, the exemption amount is $3,700 for each qualifying dependent.

The term “dependent” refers to a qualifying child or relative, determined by various dependency tests. If you are a full-time college student, you may still be claimed as a dependent on your parent’s tax return.

A dependent may have to file their own tax return, based on their gross income, earned income, and unearned income. In general, dependents must file a return if their gross income was more than $2,400, their earned income was more than $7,250, and their unearned income was more than $2,400. If a dependent is required to file a return and cannot, it is the responsibility of their parent (or legal guardian) to file it for them.

Personal Exemptions

Taxpayers are allowed to claim a personal exemption for themselves, as well as for any dependents they support. A personal exemption is similar to a tax deduction because it lowers your taxable income.

Note that if you are claimed as a dependent on someone else’s tax return, you cannot claim a personal exemption for yourself (because then the IRS would essentially be counting you twice). . This applies even if the person chooses not to claim you as a dependent. If your spouse can be claimed as someone else’s dependent, you and your spouse must file separate tax returns.

For 2010 the personal exemption amount was $3,650. For 2011 the personal exemption amount is $3,700. And for 2012 the amount will increase to $3,800.

In order to claim someone as a dependent on your tax form, you must be providing at least half of that person’s support. The gross income of this dependent must be less than the personal exemption amount for that tax year. However, if the individual is under 19, or under 24 and a full-time student, they may still be claimed as a dependent on their parent’s/guardian’s tax return. Married couples can file a joint tax return and each can claim themselves as a personal exemption on the return, even if one spouse earned no income in that year. (This is partially why filing a joint return is a common tax strategy for couples.)

When you fill out your income tax return, you must indicate on the form what your filing status is. There are five filing status options, based on marital status and other requirements.

The following filing statuses are recognized by the IRS and must be reported on your personal income tax return (Form 1040). Review each status carefully, as one may offer you more tax benefits than another, depending on your specific situation.

Single

A taxpayer may file as “single” is he/she is unmarried, divorced, legally separated, or widowed as of the last day of the calendar year (December 31st). Individuals who have dependents, but who were not the primary caregiver for more than half of the year, must also use this filing status. The IRS generally requires taxpayers to file as “single” if they do not meet the criteria for the other filing statuses.

Married Filing Jointly

Married couples who file under this status must turn one shared/combined tax return and jointly take responsibility for the income reported and taxes owed. To qualify, the couple must be legally married as of the last day of the applicable tax year. Widow(er)s whose spouse died in the past did and who did not remarry may also use this status. The majority of couples file jointly because it offers them more benefits, such as lower tax liability, than if they had filed separately.

Married Filing Separately

Married couples who files under this status generally have separate high income and/or large itemized deductions (e.g., from charitable contributions or medical expenses). However, if a couple files separately and one spouse itemizes deductions, the other spouse cannot claim the standard deduction. Also, certain tax breaks (such as student loan deductions and child tax credits) cannot be claimed, or are reduced, for separate filers. In terms of tax benefits, this status is usually considered less advantageous because it can result in a higher overall tax for a married couple. It is highly recommended that spouses compute their tax liability under both “joint” and “separate” statuses to see which will work best for them.

Head of Household

A taxpayer may file as “head of household” if he/she is unmarried as of the last day of the year (December 31st). To qualify, the head of household must also be paying for over half the costs of maintain his/her home and have a qualifying dependent (e.g., child or relative) who has lived in the home with them for at least 6 months ― special exceptions may apply to dependent parents). This status is generally used by single parents who have custody of their children. Head of household offers more benefits than the “single” or “married filing separately” statuses, including lower tax rates and higher standard deductions.

Qualifying Widow/Widower with Dependent Child

This status can only be used by a widow(er) who lives with a dependent child and has not remarried. It may apply for the year in which their spouse passed away, and it can be used for up to 2 years after their spouse’s death. A qualifying widow(er) must have been entitled to file a joint return with their spouse in the year that he/she passed, regardless of whether that return was actually filed. This filing status allows individuals to use the same tax rates as those who are “married filing jointly” as well as the highest standard deduction (provided they do not itemize deductions).

What to Know About Tax Filing Statuses

The IRS gives 8 important facts about filing statuses. These will help you choose the best status option for your particular situation.

Fact #1: Your marital status on the last day of the year determines your marital status for the entire year, for tax purposes.

Fact #2: If more than 1 filing status applies to you, you may choose the one that gives you the lowest amount of tax due.

Fact #3: The “Single” filing status generally applies to anyone who is unmarried, divorced, or legally separated according to state law.

Fact #4: A married couple may file a joint tax return together. The couple’s filing status would be “Married Filing Jointly.”

Fact #5: If your spouse died during the year and you did not remarry during 2011, usually you may still file a joint tax return with that spouse for the year of death.

Fact #6: A married couple may elect to file their tax returns separately. Each person’s filing status would generally be “Married Filing Separately.”

Fact #7: The “Head of Household” status generally applies to taxpayers who are unmarried. You must also have paid more than half the cost of maintaining a home for you and a qualifying person to be able to use this filing status.

Fact #8: You may be able to choose “Qualifying Widow(er) with Dependent Child” as your filing status if your spouse died during 2009 or 2010, you have a dependent child, and you meet certain other conditions.

MARGINAL TAX BRACKETS

Many people do not understand marginal income tax and how it affects them. One of the most common misconceptions is that moving into a higher tax bracket (e.g., from a salary increase) has a negative impact for the taxpayer because more tax is due.

For example, if you move from the 25% tax bracket to the 28% tax bracket, you may think that all of your income is taxed at that higher rate. However, only the money that you earn within the 28% bracket is taxed at that rate.

The marginal income tax rate system is known as a “gradual tax schedule.” That basically means: as you make more money, you pay more tax.

There are currently 6 marginal income tax brackets for each filing status:
10 %, 15 %, 25 %, 28 %, 33 %, and 35 %

Your marginal tax bracket is the highest tax rate that you will pay on your income.

TAX RATES

2010

Listed below are the 2010 individual income tax rates, organized by federal filing status.

Single (Rate Schedule X)
Taxable income between $0 and $8,375 ― 10% tax rate
Taxable income between $8,376 and $34,000 ― 15% tax rate
Taxable income between $34,001 and $82,400 ― 25% tax rate
Taxable income between $82,401 and $171,850 ― 28% tax rate
Taxable income between $171,851 and $373,650 ― 33% tax rate
Taxable income of $373,651 or more ― 35% tax rate

Married Filing Jointly or Qualifying Widow/er (Rate Schedule Y-1)
Taxable income between $0 and $16,750 ― 10% tax rate
Taxable income between $16,751 and $68,000 ― 15% tax rate
Taxable income between $68,001 and $137,300 ― 25% tax rate
Taxable income between $137,300 and $209,250 ― 28% tax rate
Taxable income between $209,251 and $373,650 ― 33% tax rate
Taxable income of $373,651 or more ― 35% tax rate

Married Filing Separately (Rate Schedule Y-2)
Taxable income between $0 and $8,375 ― 10% tax rate
Taxable income between $8,376 and $34,000 ― 15% tax rate
Taxable income between $34,001 and $68,650 ― 25% tax rate
Taxable income between $68,651 and $104,625 ― 28% tax rate
Taxable income between $104,626 and $186,825 ― 33% tax rate
Taxable income of $186,826 or more ― 35% tax rate

Head of Household (Rate Schedule Z)
Taxable income between $0 and $11,950 ― 10% tax rate
Taxable income between $11,951 and $45,550 ― 15% tax rate
Taxable income between $45,551 and $117,650 ― 25% tax rate
Taxable income between $117,651 and $190,550 ― 28% tax rate
Taxable income between $190,551 and $373,650 ― 33% tax rate
Taxable income of $373,651 or more ― 35% tax rate

2011

Listed below are the 2011 individual income tax rates, organized by federal filing status.

Single
Taxable income between $0 and $8,500 ― 10% tax rate
Taxable income between $8,501 and $34,500 ― 15% tax rate
Taxable income between $34,501 and $83,600 ― 25% tax rate
Taxable income between $83,601 and $174,400 ― 28% tax rate
Taxable income between $174,401 and $379,150 ― 33% tax rate
Taxable income of $379,151 or more ― 35% tax rate

Married Filing Jointly or Qualifying Widow/er
Taxable income between $0 and $17,000 ― 10% tax rate
Taxable income between $17,001 and $69,000 ― 15% tax rate
Taxable income between $69,901 and $139,350 ― 25% tax rate
Taxable income between $139,351 and $212,300 ― 28% tax rate
Taxable income between $212,301 and $379,150 ― 33% tax rate
Taxable income of $379,151 or more ― 35% tax rate

Married Filing Separately
Taxable income between $0 and $8,500 ― 10% tax rate
Taxable income between $8,501 and $34,500 ― 15% tax rate
Taxable income between $34,501 and $69,675 ― 25% tax rate
Taxable income between $69,676 and $106,150 ― 28% tax rate
Taxable income between $106,151 and $189,575 ― 33% tax rate
Taxable income of $189,576 or more ― 35% tax rate

Head of Household
Taxable income between $0 and $12,150 ― 10% tax rate
Taxable income between $12,151 and $46,250 ― 15% tax rate
Taxable income between $46,251 and $119,400 ― 25% tax rate
Taxable income between $119,401 and $193,350 ― 28% tax rate
Taxable income between $193,351 and $379,150 ― 33% tax rate
Taxable income of $379,151 or more ― 35% tax rate

Tax deductions lower your taxable income and they are equal to the percentage of your marginal tax bracket. For instance, if you are in the 25% tax bracket, a $1,000 deduction saves you $250 in tax (0.25 x $1,000 = $250).

There are three main types of tax deductions: the standard deduction, itemized deductions, and above-the-line deductions.

The Standard Deduction

The standard deduction is a dollar amount that reduces your taxable income. It is usually adjusted for inflation every year. Your standard deduction amount is based on your filing status, and it is subtracted from your AGI (adjusted gross income).

A taxpayer must use one or the other, but not both. It is generally recommended that you itemize deductions if their total is greater than the standard deduction.

The standard deductin for 2010 is as follows (based on your filing status):

• $5,700 for single filers
• $5,700 for married taxpayers filing separately
• $11,400 for married joint filers
• $8,400 for head of household filers

The standard deduction for 2011 is as follows (based on your filing status):

The standard deduction can be claimed on IRS Tax Form 1040, IRS Tax Form 1040A, or IRS Tax Form 1040EZ.

The standard deduction amount can change from year to year, and is based mainly on inflation.

The amount of your standard deduction can be reduced if you are claimed as a dependant on another person’s return. In most cases, the amount of the deduction is the greater of your earned income for the year plus $300 or $950.

There are several groups of people who do not qualify for the standard deduction. They include: a married individual with “married filing separately” status and a spouse who is itemizing deductions, a person who is classified as a “nonresident alien,” and a person who has changed his accounting cycle and is not filing for a full 12-month period.

Understanding the standard tax deduction is very important. This makes it easier for you to decide whether taking the standard deduction or itemizing your deductions is the best route for you.

Itemized Deductions

If you do not qualify for the standard deduction, you may choose to itemize your tax deductions. A taxpayer will also typically itemize deductions if it offers them more benefits than the standard deduction (i.e., when the total amount of qualified deductible expenses is greater than the standard deduction).

Certain itemized deductions are based on a minimum (or “floor”) amount. This means that you can only deduct amounts that exceed the specified “floor.”

There is also an income limit for taxpayers who itemize. If your AGI (adjusted gross income) exceeds $166,800 then a portion of itemized deductions is not permitted ― this income limit applies to single and married filers.

If you decide to itemize your tax deductions, it is important to keep detailed records of those tax deductions ― including documentation for medical expenses, property taxes, charitable donations, interest expenses, and nonbusiness state income taxes.

The sum of your tax deductions, if itemized, is subtracted from your gross income. The number that is left is known as your adjusted gross income (AGI). Common tax deductions include: student loan interest, mortgage interest, traditional IRA contributions, tuition payments, and alimony payments. Of course, this is just a small sampling of the many deductions that may be available to you.

You may use IRS Tax Form 1040 Schedule A to figure your itemized deductions, and attach it to your IRS Tax Form 1040 (but not Form 1040A or Form 1040EZ).

Above-the-Line Deductions

Above-the-line tax deductions are taken before your AGI is calculated (instead of after, like the other deductions). Because of this, many believe this type of tax deduction to be more advantageous to taxpayers. Above-the-line deductions are subtracted from your gross income, and the resulting number is your AGI. These tax deductions apply whether you itemize or not. They are designed to help protect your personal exemptions and itemized deductions from phaseouts.

Some above-the-line deductions include the following:

• Student loan interest
• Business mileage
• Moving expenses
• Alimony
• Contributions to qualified retirement accounts
• Early withdrawal penalties

Tax Deductions for Educational Expenses

Tax Deduction for Student Loan Interest

The Student Loan Interest Deduction is an education tax benefit that allows taxpayers to deduct up to $2,500 of the interest paid on student loans. This education tax deduction can be claimed on your federal income tax return to reduce your taxable income.

Student loan interest is the interest that you paid during the year on a qualified education loan. You can deduct all the interest you paid on your student loan during the year, which includes voluntary interest payments.

This deduction is claimed as an adjustment to your income. That means you do not need to itemize your deductions (on Schedule A Form 1040) in order to claim the student loan interest deduction.

A qualified student loan, or education loan, is defined as follows:

• A loan that you took out solely to pay for qualified higher education expenses
• A loan that is used for an eligible student (you, your spouse, or your     dependent) who is enrolled in a degree program at least half-time
• A loan that is not from a relative or qualified employer plan

You may claim the student loan interest deduction if you meet all of the following requirements:

• You paid interest on a qualified student loan in tax year 2011
• You are legally obligated to pay interest on a qualified student loan
• Your filing status is not married filing separately
• Your modified adjusted gross income is less than a specified amount which is set annually
• You and your spouse, if filing jointly, cannot be claimed as dependents on someone else’s return

The amount of your education tax deduction is based on your income level. The maximum amount you can claim for the student loan interest deduction in 2011 is $2,500.

If you paid $600 or more in interest on a qualified student loan during 2011, you will receive a Form 1098-E (Student Loan Interest Statement) from the entity to which you paid the student loan interest.

The following items cannot be claimed for a student loan interest tax deduction:

• Interest that you paid on a loan if you were not legally obligated to make interest payments under the loan terms
• Fees for lender services, such as loan origination fees and processing costs
• Interest payments that you made through a loan repayment assistance program (such as the National Health Service Corps Loan Repayment Program, NHSC)

To claim the student loan interest deduction, you must include it as an adjustment to your income. (Remember, you do not have to itemize your deductions for this education tax benefit.) The tax deduction can be claimed by entering the allowable amount of your deduction on Line 33 of IRS Tax Form 1040 (or Line 18 of Form 1040A; or Line 32 of Form 1040NR; or Line 9 of Form 1040NR-EZ).

Tax Deduction for Tuition and Education Fees

The “Tuition and Fees Deduction” is an education tax benefit that allows taxpayers a tax deduction if they paid the qualified education expenses for an eligible student (themselves, their spouse, or a dependent). It is an above-the-line deduction that may reduce your taxable income by up to $4,000.

You may claim the Tuition and Fees Tax Deduction if you meet all of the following requirements:

• You pay the qualified education expenses of higher education
• You pay the education expenses for an eligible student
• The eligible student is yourself, your spouse, or a dependent for whom you claim an exemption on your tax return

You cannot claim the Tuition and Fees Tax Deduction if any of the following applies:

• Your tax filing status is “married filing separately”
• Another person can claim you as a dependent in the Exemptions section of his/her tax return (note that you cannot take this deduction even if the other person does not actually claim you as their dependent)
• Your modified adjusted gross income (MAGI) exceeds $80,000 (or $160,000 if filing a joint tax return)
• You (or your spouse) were a nonresident alien for any part of the tax year and did not elect to be treated as a resident alien for tax purposes
• You (or anyone else) claims the American Opportunity Tax Credit, the Hope Scholarship Tax Credit, or the Lifetime Learning Tax Credit for qualified education expenses for the same student in the same year

Qualified educational expenses include the following:

• Tuition and related expenses required for enrollment at an eligible educational institution
• Student-activity fees and course-related books, supplies, and equipment that are paid as a condition of attendance

Expenses that do not qualify for a Tuition and Fees Deduction include the following:

• Insurance
• Medical expenses (including student health fees)
• Room and board
• Transportation
• Similar personal, living, or family expenses

An eligible student is one who is enrolled at a qualified educational institution, who has either a high school diploma or GED (General Educational Development) credential.

With the Tuition and Fees Deduction, you can reduce your taxable income by up to $4,000. However, note that there is a limit for claiming this tax deduction, based on your MAGI (modified adjusted gross income). Those limits are $160,000 for married joint filers, and $80,000 for those filing as single, head of household, or qualifying widow(er).

The Tuition and Fees Deduction is claimed as an adjustment to income on Form 1040 or Form 1040A.

To claim this deduction, you must complete IRS Tax Form 8917 (Tuition and Fees Deduction) and submit that with your Form 1040 or Form 1040A.

Rules for Combining Education Tax Benefits

Note that there are specific rules regarding which education tax benefits may be used in the same tax year. Federal education tax deductions include the Tuition and Fees Deduction and the Student Loan Interest Deduction. Federal education tax credits include the American Opportunity Tax Credit, the Lifetime Learning Tax Credit, and the Hope Scholarship Tax Credit.

You cannot use the Tuition and Fees Deduction if you claimed a tax credit (American Opportunity, Lifetime Learning, or Hope) for education expenses for the same student in the same year.

However, the Tuition and Fees Deduction can be used in conjunction with some other education tax benefits, including tax-free distributions from Coverdell ESAs (Education Savings Accounts), qualified tuition programs, and education savings bonds. To take advantage of these education tax benefits simultaneously, different education expenses must form the basis for each separate benefit.

For more information about these types of tax deductions, please see IRS Publication 970 (Tax Benefits for Education).

Tax credits can help reduce your liability dollar-for-dollar. That being said, they cannot reduce your income tax liability to less than zero. Simply put, your gross tax liability is the amount you are responsible for paying before any credits are applied.

The majority of tax credits are non-refundable. This means that any excess amount expires the year in which it is used, and is not refunded to you. There are some refundable tax credits, though ― and with these, your refund can grow.

To get a better idea of how tax credits work and whether or not you qualify, you need to know what is available to taxpayers in your situation. Some of the most common tax credits include: credits for child and dependent care expenses, education tax credits, the earned income tax credit, adoption tax credit, and the foreign tax credit.

It’s important to keep in mind that just because you qualify for one tax credit does not mean that you qualify for the rest. For example, the foreign tax credit is only available to those who pay taxes in a foreign country. Most Americans do not fit into this group, but may qualify for other types of credits.

How much are tax credits worth? Again, this depends on the particular credit you’re talking about. The child tax credit, which is one of the most popular, can be worth up to $1,000.00 depending on your situation.

Just as the amount of each tax credit is different, so are the qualification guidelines. Since a tax credit is so helpful to the overall amount of money that you pay, it is essential that you are 100% accurate with this information. In other words, if you are unsure of whether or not you qualify, it is better to check with a tax professional before including the credit on your tax return. Removing a tax credit is going to greatly affect how much you pay in taxes, thus it is better to avoid mistakes than to have the IRS catch them later on.

While tax credits are less common than tax deductions, they are available for things such as adopting a child, buying a first home, child care expenses, and caring for an elderly parent. Additionally, there are many business tax credits that you should also consider.

The main difference is that tax deductions are subtracted from your gross income, while tax credits are subtracted directly from the amount you owe. In short, this means that be able to claim a tax credit is usually better than a tax deduction.

All in all, both tax credits and deductions can help you pay less income tax. Your goal as a taxpayer should be to take full advantage of every tax credit and deduction that you qualify for. If you are unaware of which tax credits and deductions are available, hire a tax professional to show you the ropes.

Tax Credits vs. Tax Deductions

Tax credits and tax deductions can help reduce your overall income tax liability. Every year, millions of taxpayers search for credits and deductions that can help them save money. While you should take advantage of as many of these as possible, don’t overlook the fact that tax credits and deductions are not the same thing.

Which one is better? Actually, neither is better ― it mainly depends on your particular situation. Both tax credits and tax deductions offer certain benefits. They are two different ways to reduce the amount of tax that you owe. Some people qualify for many tax credits and deductions, whereas others are not able to take advantage of nearly as much.

Tax deductions lower your taxable income and they are equal to the percentage of your marginal tax bracket. For instance, if you are in the 25% tax bracket, a $1,000 deduction saves you $250 in tax (0.25 x $1,000 = $250).

Tax credits, on the other hand, provide a dollar-for dollar reduction of your income tax liability. For instance, a $1,000 tax credit actually saves you $1,000 in taxes. A tax credit is always worth more than a dollar-equivalent tax deduction, because deductions are calculated using percentages. Referring to the numbers above, you can see that a $1,000 credit offers $750 more in savings than a $1,000 deduction.

Education Tax Credits

Every year we hear about the skyrocketing costs of higher education. Attending college is a major financial commitment and the majority of students do not qualify for scholarships, grants, or other financial aid. Additionally, many adults are going back to school these days in hopes of acquiring more education or training to get a job promotion, earn more money, or find a more rewarding career.

In response, the federal government has created two major education tax credits to help reduce the costs of obtaining a higher education.  The American Opportunity Tax Credit (AOTC) is a modified version of the Hope Scholarship Credit. The AOTC provides a maximum $2,500 credit for each student pursuing a degree, for up to 4 years of post-secondary education.  The Lifetime Learning Tax Credit offers a credit of up to $2,000 ($4,000 for students in certain disaster areas) for qualified education expenses.  Note that the student may elect to receive only 1 education tax credit and certain income limitations apply.

Highlights of both education tax credits include the following:

The American Opportunity Tax Credit (AOTC)

Under the American Recovery and Reinvestment Act (ARRA), the IRS modified the education tax credit formerly known as the Hope Scholarship Credit for tax years 2009 and 2010, and created the American Opportunity Tax Credit (AOTC).

The tax credit was extended to apply for years 2011 and 2012 as well.

The American Opportunity Credit is available to a broad range of taxpayers — including those with higher incomes, no income, and people who owe no tax. Updates to this tax credit have added required course materials to the list of qualifying expenses and allows the credit to be claimed for 4 post-secondary education years instead of just 2. Many of those who are eligible will qualify for the maximum annual credit of $2,500 per student.

The IRS states that the full credit is available to individuals whose modified adjusted gross income (MAGI) is $80,000 or less — or $160,000 or less for married couples filing a joint return. The credit is then phased-out for taxpayers with incomes above these levels.

The American Opportunity Tax Credit is:

• Available for the first 4 years of post-secondary education.
• Allows for a tax credit up to $2,500 per student.
• Up to 40% of the total tax credit may be refundable, meaning that that even     people who owe no tax can get an annual payment of the credit of up to $1,000     for each eligible student.
• Covers tuition and fees, and course materials.

The American Opportunity Tax Credit is not available to graduate students who have already completed 4 years of college, although they may still qualify for the Lifetime Learning Tax Credit and the Tuition and Fees Tax Deduction. For details on these and other education-related tax benefits, see IRS Publication 970 (Tax Benefits for Education).

The Lifetime Learning Tax Credit

You may be able to claim a Lifetime Learning Credit of up to $2,000 for qualified education expenses paid for an eligible student. Additionally, there is no limit on the number of years the this tax credit can be claimed.

The Lifetime Learning Credit is a non-refundable credit. This means that it can reduce your tax to zero, but if the credit is more than what you owe in tax, the extra amount will not be refunded to you.

The amount you can claim for this tax credit may be limited based on your income and the amount of your tax.

In general, you can claim the Lifetime Learning Credit if all three of the following requirements are met:

• You pay qualified education expenses of higher education
• You pay the education expenses for an eligible student
• The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return

For more information about these types of tax credits, please see IRS Publication 970 (Tax Benefits for Education).