1040 mysteries revealed

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Top things to know So, what's your tax bracket? How much you should withhold What's FICA again? Who needs to pay estimated taxes A word about penalty and interest charges 1040 mysteries revealed Alternative minimum tax: What you should know The dreaded audit: What are the chances? The best time for tax planning

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In January of every year, you will receive a host of tax statements - the information you'll need to fill out your return.

Any information you receive will also have been sent to the IRS, so look them over carefully and be sure to report their data accurately on your return.

- Your W-2 form reports how much money you made at your job and how much tax you paid for the year.

- The 1099-G reports unemployment compensation or state tax refunds.

- The 1099-R reports retirement-plan income.

- The 1099-MISC reports income if you're an independent contractor, collected rent, or received royalties.

- Other 1099s, such as the 1099-B, 1099-DIV, and 1099-INT, report income from financial transactions (in this case, capital gains, dividends and interest income, respectively).

- Many of your 1099 forms get reported on the schedules that round out your 1040. For instance, if you're self-employed, you may need to file Schedule C and Schedule SE. If you received rent or royalties, you may need to file Schedule E. Capital gains get reported on Schedule D. Interest and dividends, if they exceed a certain amount, get reported on Schedule B.

By simply going through the 1040 line by line you'll see what schedules you need.

The number at the bottom of the first page of the 1040 is your adjusted gross income (AGI) - your total income minus certain adjustments, such as IRA deductions, alimony payments, and medical savings account contributions.

Your AGI determines whether or not you're eligible for tax breaks and also determines whether you're eligible to make deductible IRA contributions or to open a Roth IRA.

Your AGI minus all other exemptions and deductions to which you're entitled equals your taxable income. Say your AGI is $70,000 and you can subtract $7,850 in deductions plus another $6,800 for personal exemptions. Your taxable income is $55,350.

The more exemptions and deductions you take, the lower your taxable income.

You're entitled to take a personal exemption for yourself, a spouse, and each dependent. But if your AGI exceeds the limits set (for tax year 2008, they were $159,950 for singles; $239,950 for married couples filing jointly; and $199,950 for heads of household), your exemption will be reduced.

The 2001 Tax Relief Act reduces this hit on exemptions starting in 2006 and eliminates it completely by 2010.

Everyone is also given a standard deduction, which is inflation-adjusted; for tax year 2008 it is $5,450 for singles, $10,900 for married couples filing jointly and $8,000 for heads of households.

But you might be better off itemizing your deductions if you add up everything that you're permitted to deduct, such as mortgage interest, charitable contributions, and state taxes - and that amount exceeds the standard deduction. If that's the case, list all your deductions on Schedule A and attach it to your 1040.

Tax credits

Unlike deductions and exemptions, which lower your taxable income, tax credits are dollar-for-dollar reductions of the taxes you owe and are worth more than a deduction or exemption of the same amount.

Say you're in the 28% bracket and owe $1,000 in taxes. If you can take a $100 tax credit, you'll only have to pay $900 in tax ($1,000 minus $900). A $100 deduction, by contrast, only reduces your tax liability by $28 ($100 multiplied by 0.28), which means you'll pay $972 in taxes.

There are lots of books to help you sort through your annual return and give you a basic understanding of taxes. Three favorites that you'll find in any bookstore: "J.K. Lasser's Tax Guide, Ernst and Young Tax Guide," and "The Wall Street Journal Guide to Understanding Your Taxes."

You also can find online sources of help by checking out the CNNMoney Tax Center. If you need federal forms and instructions, go to the IRS Web site.

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