Income

• The first thing you must do when you prepare your tax return is to calculate your total income for the year. If you work for an employer, your total wages for the year will be reported to you on a W-2 form. This same form will also report the amount of federal taxes that were withheld from your paycheck. However, you must also include other types of income not reported on the W-2. This includes any alimony payments you receive, capital gains from stock sales, interest, dividends and unemployment compensation, to name a few. Essentially, unless money you receive during the year is specifically exempt from tax, you must report it as part of your gross income.
  
  

Adjustments to Income

• Once you calculate your total income, it's time to start reducing that amount with some deductions to determine your Adjusted Gross Income (AGI). This group of deductions includes the alimony payments you make to a former spouse, educator expenses, self-employment taxes, tuition and student loan interest deductions, health savings account contributions and the IRA deduction for contributions you make to retirement accounts, such as your 401K.
  
  

Deductions

• The tax law gives you the choice between claiming a standard deduction or itemizing your expenses. The standard deduction is predetermined each year, so no calculation is necessary. You would choose this if the total of your expenses for the year that are eligible to be itemized are less than the standard deduction amount, since a larger deduction will always provide you with more tax savings. However, before you can even compare the two, you must first understand what qualifies as an itemized deduction. A good place to start is with the instructions to Schedule A, since you must report all itemized deductions on it. Common itemized deductions include mortgage interest on your home, state and local property and income taxes, medical expenses, charitable contributions plus an array of miscellaneous expenses that include costs associated with your work.
  
  

Exemptions

• After choosing which type of deduction to take, the IRS allows you to claim one exemption for yourself and for each person you report as a dependent. Frequently, you can claim your child, if he is under the age of 19 or 24 if attending school, as a dependent as long as he resides with you. You are also eligible to claim people that you support who are not your children. The exemption for each of these dependents reduces the amount of your income that is subject to tax in the same way as a deduction. Each year, the IRS determines the standard exemption amount so all you need to do is multiply it by the number of dependents you are claiming.