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We study anatomy to identify parts of the human body. We study physiology to understand how those human parts work together to, for example, find and digest food, procreate, and pay taxes. This simple study approach is the foundation of modern medicine and, for the most part, the basis for most of us living healthy and productive lives. We can apply this same study approach to personal federal income taxes; we need to first classify parts of a federal tax return and then study how parts work together to achieve one end; how much you owe in taxes. With every passing year and the passing of revisions in the income tax code, running your life is increasingly like running a home-based business. There is no valid disagreement that paying our share in taxes is clearly the responsible way to support, at the very least, our great nation but, we similarly want to exercise control over our lives and have the freedom and wherewithal to pursue our own bliss. Careful management of YOUR cash, YOUR credit, and YOUR taxes, now more than ever, are the foundation for maintaining financial health and achieving your life-time goals. Just like sports medicine attempts to optimize speed and strength through knowledge of anatomy and physiology, understanding the interaction of income with deductions and credits can similarly maximize a refund and minimize a tax liability.

In simple “anatomical” terms, your federal personal tax return (whether the short Form 1040EZ, the medium Form 1040A, or the long Form 1040) begins at the top of the page with Income. The long form includes ALL possible forms of earned or unearned income. Income includes for example, daily wages, gains made through sale of assets, savings account interest, stock dividends, rental income, royalty payments, and finally “Other Income” like gambling or lottery winnings.

The next section after Income is called Adjustments because these “subtractions” reflect tax-significant financial decisions that “adjust” (decrease) an individual’s annual gross income. Special teacher expenses, student loan interest, moving expenses, special medical/education/retirement payments/contributions, paid alimony, and a portion of self-employment taxes are examples of these adjustments. Our personal income tax system recognizes these “exceptional” events as noteworthy modifications to individual’s gross income during the tax year. Thus, a possible fair way to determine the taxes one owes is to adjust (reduce) one’s gross income for specific actions or events that are taken or occur in the tax year BEFORE income taxes are calculated. Your gross income is modified and recalculated as Adjusted Gross Income (AGI). It is copied from the bottom of the first page on line 37 of the long IRS Form 1040 over to the top of the second page on line 38 of your federal tax return.

Keep your Adjusted Gross Income handy. This number is used by the Internal Revenue Service (IRS) as a security tool. If you visit the IRS website, IRS.gov, and request personal information, don’t be surprised when you are asked for your AGI from the previous tax year! The IRS uses the number to verify your identity online like a password or personal identification number (PIN). Your AGI is more important than you thought!

Are you unemployed or struggling with personal finances?  There is a new informational section on the government website, IRS.gov, that has information and web links to tax-related resources, tax assistance information, and suggestions that could help you through these difficult financial times. The Tax Center to Assist Unemployed Taxpayers has been created to offer advice, free publications, links to sources for tax planning, tax settlement plans, offers in compromise, etc. as well as other relevant topics for which you need planning information. There are also links to videos, health insurance information, and other IRS publications covering topics like bankruptcy, cancellation of debt income, and bartering income. Get information directly from the “horse’s mouth” rather than your well-intentioned neighbor or friend.

The IRS wants you to know about penalties if you don’t file your 2009  tax return by April 15, 2010.  The government website’s newsroom offers the following advice:

There are two different penalties you potentially face: a failure to file and a failure to pay penalty.  The failure to file penalty is applied when you do not file by April 15 (and have not applied for an extension). You face a failure to pay penalty if you do not pay the taxes you owe by the tax filing deadline.  Since the failure to file fines are usually larger than the failure to pay penalty, it is always best to file a tax return and negotiate a payment option plan rather than failing to file on time.  Late filing penalties are usually 5 percent of unpaid taxes for every month or part of the month (up to 25 percent of your entire tax liability) that the return is delayed in filing.  If you file a return more than 60 days after the due (or extended due) date, you will be fined the smaller of $135 or 100 percent of the taxes you owe.

You will have to pay a failure to pay penalty of 1/2 of 1 percent of the amount of taxes you owe (up to 25 percent) for each month beyond the date the taxes are due. If you file an extension and pay at least 90 percent of your tax liability by the filing deadline, you can avoid a failure to pay penalty by completing the filing and payments by the extended due date.  You will not have to pay a failure to file or a failure to pay penalty if you can prove that your delayed filing or payment was not willful neglect but had reasonable cause.   More information about avoiding penalties is available at the IRS government website, www.irs.gov.

There are several qualifications for claiming an adult as a dependent:
1. You as the taxpayer must provide over 50 percent of your dependent’s living or support costs.
2. Your dependent must either live with you for 12 months or be your parent, grandparent, step-parent, aunt, or uncle.
3. Assuming the person does not have a disability, your dependent cannot have a gross income that exceeds the tax year’s exemption amount. The exemption amount in 2009 is $3,650.
4. Your dependent cannot file a joint return with another person for the year unless that tax filing is only completed in order to claim taxes that had been withheld.
5. Your dependent must be a US citizen, a US national, or a resident of the US, Canada, or Mexico.

A taxpayer may qualify for the Child and Dependent Care Credit if their dependent lives with them for more than 6 months of the year and have physical or mental issues that prevent them from caring for themselves. Visit the IRS website or consult Publication 503, Child and Dependent Care Expenses for further information.

Are you 65 or older (or under 65 and disabled)? Are  you a US citizen?  Are you a Single filer with an  adjusted gross income (AGI) less than $17,500?  Is the nontaxable portion of your Social Security or other nontaxable pensions, annuities, or disability income under $5,000?  You need to file Schedule R for a tax credit of $750! Read IRS Publication 524, Credit for the Elderly or Disabled or call 1-800-829-3676 and ask to have a copy mailed to you.

Don’t forget the IRS Helpline – 1-800-829-1040 or your nearest IRS Taxpayer Assistance Center.

If you need help filing your tax return or have questions, call 1-800-906-9887 for an IRS sponsored Tax Counseling for the Elderly. You will be provided free tax preparation and counseling if you are 60 or older and a low to middle income taxpayer. These days, most of us qualify and can use the help!