As we head into 2011, it’s time to truly understand your taxes. Let’s face it, it’s a lot better to get money back each year than to owe money. Fortunately when you take the right steps now, you can make sure that you get the best results. So let’s go over some tax basics.

First, let's explore the difference between tax deductions vs. tax credits. A tax deduction is an amount of money or expense taken “off the top” from your gross income. Examples of a deduction would be your traditional IRA contributions, 401(k) or 403(b) contributions, student loan interest, etc. After all the deductions are subtracted from your gross income, you are left with your adjusted gross income (AGI). Subtracted from your AGI is your standard deduction or itemized deduction. After “all is said-n-done” you are left with your taxable income. This amount determines how much tax you will owe known as tax liability, or many refer to it as your tax bill. A tax credit is a dollar-for-dollar reduction. This amount is not taken “off the top” from your gross income, but, rather is subtracted from your tax bill. For example, your tax bill is $1500 and your tax credit is $1000. Your tax bill is reduced to $500 ($1500-$1000).

There are many ways a person can become eligible for a tax deduction or tax credit. You can speak to your CPA/tax advisor in order to get direct advice for your financial situation. But in the meantime here are some tax tips we felt would be beneficial.

Tax Tips that help you minimize your tax deductions:

1.Donate: Is your closet full of clothes you no longer wear anymore? Ever heard of the phrase “one man’s trash is another’s man’s treasure?” Donate and get a receipt for your donations. If you are donating cash, make sure you keep records of that as well.

2.Contribute to your retirement plans: As you may already know, your contributions to your Traditional IRA (max contribution is $5,000) and defined contributions plans, such as a 401(k), 403(b), and/or 457 plans (max contribution is $16,500) is a tax deduction. Your contributions to these plans are pre-tax which means you are contributing a portion of your gross salary. Contributing $50 every paycheck doesn’t mean a $50 reduction from your net pay. It means $50 from your gross salary.

3.Moving Expenses: If you had to move because of a job, you can deduct the cost of moving as long as the job was at least 50 miles from where you lived.

4.Hope Credit and Student Loan Interest: For the Hope Credit, you may be eligible to claim up to $1,800. Keep in mind you will apply the Hope Credit to your tax liability. For the student loan interest, you may be eligible to deduct from your income up to $2,500.

Moreover, it’s essential you keep a folder of any documents relevant to your finances; such as your education expenses, moving expenses, mortgage interest, investment statements, etc. By the end of January 2011 you should have received your W-2s, 1099s, etc in the mail from the IRS. Furthermore, make sure you visit the IRS website. This website provides more information on what records to keep, why you should keep records, and how long to keep records.

As you can see, a little knowledge can go a long way and put extra money back in your pockets. For additional tax tips stop by our blog at Moneyliciousblog.

Author's Bio: 

Want more tax tips? Ornella Grosz blogs regularly at http://www.moneyliciousblog.com and is the author of Moneylicious: A Financial Clue for Generation Y. http://www.moneyliciousbook.com/. She has been featured on Forbes, AOL’s WalletPop and Daily Finance, More Magazine and more. Article is free to be reprinted as long as bio remains.