How Tax Deductions Work

"You can deduct that." "You can write that off." "Deductible expenses."

You've probably heard these phrases a hundred times. But what do they mean? What are tax deductions and how do they work? And why are tax deductions so important?

The purpose of tax deductions is to decrease your taxable income, thus decreasing the amount of tax you owe to the federal government. There are hundreds of ways to use deductions to reduce your taxable income, but many people don't know about them or know how to take advantage of them. According to H&R Block, over 4 million people don't claim the tax deductions for which they're eligible.

To find out how you can maximize your deductions, it's best to talk to a tax professional, such as a tax prepare or lawyer. It's their job to know about tax deductions, and they can guide you to use deductions efficiently and legally. The earlier in the year you learn about possible deductions, the easier it will be to take advantage of them. This article will teach you the basics so that you'll have a good understanding of the deductions that may apply to you.

A lot of people think that deductions are just for the rich and famous. That's not so. A wealth of tax deductions and credits are available to middle- and lower-income taxpayers. The biggest dividing line in the world of deductions is itemizing. Whether or not you can itemize plays an enormous role in the world of deductions.

In this article, we'll find out what itemizing is, exactly. We'll also discuss how to claim deductions on your federal income tax return, even if you don't itemize. Finally, we'll go through a number of examples of deductions to help you save on your taxes every year.

Home / Money / Personal Finance / Financial Planning How do stock options work?

Job ads in the classifieds mention stock options more and more frequently. Companies are offering this benefit not just to top-paid executives but also to rank-and-file employees. What are stock options? Why are companies offering them? Are employees guaranteed a profit just because they have stock options? The answers to these questions will give you a much better idea about this increasingly popular movement.

Let's start with a simple definition of stock options:

Stock options from your employer give you the right to buy a specific number of shares of your company's stock during a time and at a price that your employer specifies.

Both privately and publicly held companies make options available for several reasons:

• They want to attract and keep good workers.
• They want their employees to feel like owners or partners in the business.
• They want to hire skilled workers by offering compensation that goes beyond a salary. This is especially true in start-up companies that want to hold on to as much cash as possible.

Go to the next page to learn why stock options are beneficial and how they are offered to employees.

Understanding Health Insurance

In 2006, almost 43 million Americans had no health insurance, which translates into nearly 15 percent of the American population. This might be attributed to the fact that health care costs can be very expensive, and the cost of even the most basic care is steadily rising. Today, the amount Americans spend on health care is four times as much as the government spends on national defense. So it's no surprise that along with increased health care cost comes increased health insurance premiums. Employers typically bear the brunt of the expense for health insurance, but individuals are paying more and more each year as well. In 2006, employer insurance premiums increased 7.7 percent, twice the rate of inflation.

But what exactly is it you're paying for? Where does your monthly premium go if you don't get sick or go to the doctor? What do you do if you're not working or you're self-employed? What's the difference between all of the various plans there are to choose from? The maze of information you have to wade through about claims, co-pays, co-insurance,deductibles and more is enough to make your head swim.

In this article, we'll break down the main types of plans and explain their differences. Keep in mind that there are always variations in individual plans, but we'll at least give you a head start when you're trying to select the right plan and coverage for you.

How Employee Compensation Works

If you own your own business, your employee compensation and benefits package can be the deciding factor for many potential employees. And it's not just the money. To make your company competitive and attractive to job candidates, you have to offer an exceptional total benefits package. That makes it a very important part of your business planning and management process if you hope to hire (and keep) top employees.

So how do you make your benefits package attractive and competitive without financially jeopardizing the success of your business? How do you get the best deals on insurance? What perks can you offer that won't cost you additional money, but will mean a lot to your employees? Are stock options the way to go? How do you set salaries? What benefit costs are tax deductible? There are probably 100 more questions popping into your head as you start thinking about how to set up and manage these policies.

In this article, we will answer some of those questions and direct you to resources to help you find answers to the ones we don't get to here.

First-million story #7 - Invest a little and let it grow

Neil McCarthy started investing in the stock market when he was 34, in the depths of the 1970s bear market. "It got scary for a while," he recalls, "but my philosophy was to invest a little bit and let it grow. When stocks went down, I would buy more."

McCarthy contributed the maximum to both his IRA and his 401(k) at Union Carbide, where he started as a research chemist and got a boost from a 100% employer match. He and his wife, Maureen, who worked as a teacher for several years, continued to save for retirement, even while they were paying for their two sons' college educations.

Their big payoff came with the 1990s bull market. "Everything kept adding up and compounding, and then it doubled in three or four years," says Neil. "It was $500,000, and suddenly it was $1 million."

The McCarthys invested mostly in stock funds, but avoided technology companies. "People were going wild with Internet stocks, but it didn't make sense to me," says Neil, who did financial analysis when he worked in marketing for Union Carbide. "When I saw P/E ratios of 200 to 300, I thought it was absolute nonsense."

Their practical investing style preserved their millionaire status when the market crashed. They also benefited from a bit of fortuitous timing when Neil, who spent the last 14 years of his career working for BP Amoco, retired in 2000. He took his retirement payout as a lump sum and invested part of the money in an immediate annuity just before interest rates started to fall, getting a bigger payout than if he had chosen the company's pension annuity.

Neil, 65, and Maureen, 61, have $1.3 million in savings, which they haven't had to touch. Counting the annuity and Neil's pension from his 20 years with Union Carbide, they have a net worth of about $2.1 million. And that doesn't include their house in Roswell, Ga., valued at about $525,000, which is almost paid off.

The McCarthys are classic stock-market millionaires, reaping the benefit of steady investing through bull and bear markets. But one piece of simple advice made all the difference: "If you wait to save out of what's left over from your salary, it's not going to happen. Pay yourself first."