Tax season is over and I stopped blogging near the beginning, so I haven't had a chance to share about my experiences. As some readers will know, I've worked with taxes the last four years as a part of the Volunteer Income Tax Assistance (VITA) program. The program is established by the IRS and includes training (online or book) and certification to assist taxpayers with their taxes. We use software designed specifically for the VITA preparers and have support from the software company.
Locally, the program is coordinated by the United Way, who provides laptops and additional "volunteers". I put the word "volunteers" in quotes as the people are typically Americorps workers. I don't know a lot about Americorps, but I think the workers get a small stipend (and medical benefits) for their work and have to provide a certain number of hours. They can use their VITA time as a credit for those hours.
This year I went through certification to the Advanced level (Basic-> Intermediate-> Advanced) and stepped up to Site Coordinator certification. (last year I didn't do Site Coordinator, but did Military, Cancellation of debt and Health Savings Account certification). I also stepped up to the responsibility of Site Coordinator 1/2 time at one of the sites where I work.
This year we had to take an ethics test as a part of certification. The ethics questions were VERY basic, but the scary thing is that you know someone has violated each of the codes they gave us.
As a part of the program, we're not allow to discuss any details about the taxpayers. I can tell you that this year was busier than the last two years. I also believe that I processed less W2-G (unemployment) forms than previous years. I think these two facts show that more people have jobs. They may be lower paying jobs than they had previously, but they have jobs.
I also think I did more past-year (2010 & 2009) taxes than in previous years. These are people who didn't file for some reason or another (one person said he was asleep that year - must've been a good nap!) and they want to get caught up. It makes me feel good to help people like this. As someone who pays a lot of taxes, I'm always anxious to help others pay their fair share.
There were some low points to the year. A few people seemed intent on cheating the system or making up numbers. One man came in the last day (we were slammed and a volunteer short) and wanted me to do his 2010 taxes. I was unable to help him. He honestly believed he didn't need to file, as he was retired. The IRS sent him a letter explaining differently. I felt bad for him, but simply didn't have time. I did do his 2011 taxes.
Lessons for next year is for me to start earlier. The site coordinator role was less intense (but more nerve-racking) than I imagined. But there was more training available that I could have used greatly. Also, I should have done the training on Cancellation of Debt (one case came in, I handled it after a lot of research) and Health Savings Account (three taxpayers needed help - two were family). These areas aren't so complex, but a refresher would have been good.
I also had a chance this year to explain to a fellow conservative IN DETAIL how the Earned Income Tax Credit works. It was an enlightenment to him that I had so much information and that some of his information was wrong. Any reader who wants to know more, or thinks the program is full of holes, needs to send me a note and I'll help them understand the details. I'm not justifying the program, I'm saying this is how it works and if you want to eliminate it, you have to say so explicitly (my biggest complaint with the "Fair Tax" and 9-9-9).
I plan to continue and to be site coordinator again next year (if needed). The work is very rewarding. I tried to recruit a couple of people this year and failed. Next year, won't you help? I'll be glad to help with training and information.
Showing posts with label income tax. Show all posts
Showing posts with label income tax. Show all posts
Tuesday, April 24, 2012
Wednesday, February 15, 2012
What did you do with your $40?
There's a big push on right now to save the payroll tax break. If you haven't heard it, you're probably not listening to the TV or radio or getting your news from the internet. Are you living under a rock? The White House is even using their website to encourage people to tell their congressman "what $40 means to you and your family." However, I think the White House is asking the wrong question, they should be asking "what did you to with your $40?"
See, the tax break is already in place. It has been for over a year now as an attempt to stimulate the economy. All of 2011, you got the tax break, and hopefully were stimulated. Of course, most people weren't stimulated, but it's clear if you look at the tax rates here. The tax break was debated (Ad nauseam) in December and was extended for 2 months. Using the assumptions that got us to $40, you should now have received $160 in tax breaks. What did you do with that? Do you feel stimulated? If you want to read more and are in the mood for a long paper on this stimulus payment (and why this was ineffective), the Federal Reserve Board has written a long white paper at this site.
It turns out most people don't know what they did with the tax break (see here), but a lot of people are ready to give congress low ratings for something they know nothing about. That's why in December, congress reversed itself and extended the cuts. After all, these guys are up for re-election and if the public complains about something, even if it's something the public doesn't understand, congress listens.
So where does the $40 number come from? Well, it's based on the "average" income of $50,000. I've sent emails to a few news organizations that mess up the math and say it's $40 per week, it's actually only $40 every two weeks. And it's actually lower, as it assumes 25 paychecks a year, not 26. I guess if you take two weeks vacation without pay it works out. But if anyone tells you it's $40 per week, ask them if they are making $100,000, because that's what they have to be assuming to make the math work. (the news organizations I've emailed never responded).
The tax break is "fair" - it's evenly distributed among the poor and the wealthy. In fact if you look at a percentage, it's more for the low-income people. For the "average" person making $50,000 it's 2%, for someone making $200,000 it's only about a 1% savings. And for people who don't get a W2 or 1099 for their income (like several of the super-rich candidates), there's no savings at all as a result of this "tax break."
So, before you call your congressman to tell him what you can do with the $40, think about what you did with the $40 tax break you're already receiving. This isn't going to give you an EXTRA $40, it will just leave things the way they are.
See, the tax break is already in place. It has been for over a year now as an attempt to stimulate the economy. All of 2011, you got the tax break, and hopefully were stimulated. Of course, most people weren't stimulated, but it's clear if you look at the tax rates here. The tax break was debated (Ad nauseam) in December and was extended for 2 months. Using the assumptions that got us to $40, you should now have received $160 in tax breaks. What did you do with that? Do you feel stimulated? If you want to read more and are in the mood for a long paper on this stimulus payment (and why this was ineffective), the Federal Reserve Board has written a long white paper at this site.
It turns out most people don't know what they did with the tax break (see here), but a lot of people are ready to give congress low ratings for something they know nothing about. That's why in December, congress reversed itself and extended the cuts. After all, these guys are up for re-election and if the public complains about something, even if it's something the public doesn't understand, congress listens.
So where does the $40 number come from? Well, it's based on the "average" income of $50,000. I've sent emails to a few news organizations that mess up the math and say it's $40 per week, it's actually only $40 every two weeks. And it's actually lower, as it assumes 25 paychecks a year, not 26. I guess if you take two weeks vacation without pay it works out. But if anyone tells you it's $40 per week, ask them if they are making $100,000, because that's what they have to be assuming to make the math work. (the news organizations I've emailed never responded).
The tax break is "fair" - it's evenly distributed among the poor and the wealthy. In fact if you look at a percentage, it's more for the low-income people. For the "average" person making $50,000 it's 2%, for someone making $200,000 it's only about a 1% savings. And for people who don't get a W2 or 1099 for their income (like several of the super-rich candidates), there's no savings at all as a result of this "tax break."
So, before you call your congressman to tell him what you can do with the $40, think about what you did with the $40 tax break you're already receiving. This isn't going to give you an EXTRA $40, it will just leave things the way they are.
Thursday, January 05, 2012
My name is RB and I endorsed this message - Platform priorities
Yesterday I explained that I wanted to lay out what I thought were important priorities for the Presidency 2012-2016. This will be the planks of my platform should I decide to stick with the idea of the run (it will have to be a write-in campaign).
In preparation, I looked back at what I said in 2008. I think the same issues apply, so I'm going to steal heavily from my ideas back then. One difference I notice between 2008 and 2012 is the lack of focus on change. In 2008, almost every candidate was talking change (both the D's and the R's). Well, change happened, we went from a Republican in the White House to a Democrat. Some might say too much changed, some might say too little. But change happened.
My focus will be pretty much the same as last time, with some change thrown in for good measure. Here are the areas I see that need to be addressed for the next four years. This post won't tell you my opinion on any one topic, but instead will list topics I intend to cover later. They will be somewhat in priority order, but that's subject to change (there's that word) later on.
In my platform, I intend to address these topics:
1. National Defense - Iraq is over. Afghanistan will be soon. The current budget outlook for defense means major cuts. We're relying less on boots-on-the-ground and more on drones-in-the-air and special ops. Where do we go from here?
2) Foreign affars - Russia, Pakistan, Iran, India, Europe, Africa, South America, China (including trade) and Mexico (including immigration) - My only update to this list is to add the Middle East (Egypt, Libya, Israel, Syria, etc) and North/South Korea
3) Isolationism vs. becoming entangled in the affairs of other nations - it seems one candidate wants us to pull back and focus on US alone, I'll look at my ideas four years ago and update them.
4) National economy - Jobs, training, mortgages, housing, taxes and spending. I know you think this should be higher. When I look at the economy, I'll explain why it's ranked #4.
5) Healthcare, education and abortion, global warming, carbon credits (hopefully, I'll explain why I grouped these)
6) Points of light - This is an old George H Bush idea. I mentioned it yesterday in a phone conversation with a friend and think it needs to be addressed.
What did I leave out? What do you, the voter and my readers, want me to address?
In preparation, I looked back at what I said in 2008. I think the same issues apply, so I'm going to steal heavily from my ideas back then. One difference I notice between 2008 and 2012 is the lack of focus on change. In 2008, almost every candidate was talking change (both the D's and the R's). Well, change happened, we went from a Republican in the White House to a Democrat. Some might say too much changed, some might say too little. But change happened.
My focus will be pretty much the same as last time, with some change thrown in for good measure. Here are the areas I see that need to be addressed for the next four years. This post won't tell you my opinion on any one topic, but instead will list topics I intend to cover later. They will be somewhat in priority order, but that's subject to change (there's that word) later on.
In my platform, I intend to address these topics:
1. National Defense - Iraq is over. Afghanistan will be soon. The current budget outlook for defense means major cuts. We're relying less on boots-on-the-ground and more on drones-in-the-air and special ops. Where do we go from here?
2) Foreign affars - Russia, Pakistan, Iran, India, Europe, Africa, South America, China (including trade) and Mexico (including immigration) - My only update to this list is to add the Middle East (Egypt, Libya, Israel, Syria, etc) and North/South Korea
3) Isolationism vs. becoming entangled in the affairs of other nations - it seems one candidate wants us to pull back and focus on US alone, I'll look at my ideas four years ago and update them.
4) National economy - Jobs, training, mortgages, housing, taxes and spending. I know you think this should be higher. When I look at the economy, I'll explain why it's ranked #4.
5) Healthcare, education and abortion, global warming, carbon credits (hopefully, I'll explain why I grouped these)
6) Points of light - This is an old George H Bush idea. I mentioned it yesterday in a phone conversation with a friend and think it needs to be addressed.
What did I leave out? What do you, the voter and my readers, want me to address?
Monday, December 12, 2011
My response to Occupy Wall Street
Last week I published a summary of my interpretation of Occupy Wall Street. The movement has sprung up in many cities and appears to be similar in all of these. This is my response to those movements.
First, let me say that I get it. There's a lot of frustration out there. People are out of jobs and worse yet, they feel their future has been stolen by financiers who haven't been and won't be punished for their incompetence. People like Patrick Meighan have been arrested (read his story here) and jailed over non-violent protests. I know that there have been some criminal acts committed by some of the Occupiers, but that doesn't change the message these people are trying to bring (it doesn't excuse it, but that's a different story).
I also agree with parts of the message of the Occupy movement, the financiers should be punished. The banks should have been allowed to fail and the people creating the mess should certainly not be in charge of the business that I involuntarily bailed out. And like them, I'm not convinced that the system can work itself out - I'm just that cynical.
But I also know that we live in the United States of America, a country with a system of laws and that we have to obey those laws. Even if politicians and bankers committed fraud and theft, that doesn't give me the right to break laws. If someone refused to leave when instructed by police, they deserve to be arrested. When Mr. Meighan (same story as above) was arrested, he complained in his blog that in most situations of this type, "the police just give you a ticket and let you go. It costs you a couple hundred dollars." One thing that is different in his case is that he would have gladly taken the ticket and ripped it up and never left the park he occupied. Police have an obligation to enforce the law (which he acknowledges in his blog) and in that case that meant physically removing the Occupiers and cleaning out the park.
I also know that it's possible to move up in the world. I grew up in a not-too-priviledged environment. I won't go into the details, but my college was paid on a combination of scholarships and grants (until I lost the grant because I made too much in a below-minimum wage job). I have worked at one job or another (and sometimes two at the same time) since 1973. My father taught me that there is always a job available for someone who was willing to work. This past weekend, I heard that Scheider National Trucking needs to hire 41,000 and Pizza Hut needs to hire 28,000. These may not be jobs that people want or may not pay as much as their last job, but they are jobs. And they pay at least minimum wage.
I decided sometime back to adopt the slogan "Think Globally, Act Locally." What that means to me is to elect the kind of representatives who push an agenda of personal responsibility. I believe this is the only way (if there's a way) to fix our national problem. By encouraging people to work, even at low-paying jobs, to pay off debts and to support the family, politicians begin encouraging a way out. As for acting locally, charity begins at home, helping the people in your community. I can't help Mr. Meighan in LA, but I can help the single lady in our church who sells real estate and hasn't sold any in a while. I can help the people who will come to me in February through April to file their tax returns (without charging them) so they can get the refunds and credits that are available under current law. I can help the couple whose husband is in a wheel chair and unable to work.
So while I understand the Occupy movement, I can't say I agree with it. I believe that instead of protesting, the occupiers would be better of returning to work and starting their own personal recovery. That's my thoughts, what are yours?
First, let me say that I get it. There's a lot of frustration out there. People are out of jobs and worse yet, they feel their future has been stolen by financiers who haven't been and won't be punished for their incompetence. People like Patrick Meighan have been arrested (read his story here) and jailed over non-violent protests. I know that there have been some criminal acts committed by some of the Occupiers, but that doesn't change the message these people are trying to bring (it doesn't excuse it, but that's a different story).
I also agree with parts of the message of the Occupy movement, the financiers should be punished. The banks should have been allowed to fail and the people creating the mess should certainly not be in charge of the business that I involuntarily bailed out. And like them, I'm not convinced that the system can work itself out - I'm just that cynical.
But I also know that we live in the United States of America, a country with a system of laws and that we have to obey those laws. Even if politicians and bankers committed fraud and theft, that doesn't give me the right to break laws. If someone refused to leave when instructed by police, they deserve to be arrested. When Mr. Meighan (same story as above) was arrested, he complained in his blog that in most situations of this type, "the police just give you a ticket and let you go. It costs you a couple hundred dollars." One thing that is different in his case is that he would have gladly taken the ticket and ripped it up and never left the park he occupied. Police have an obligation to enforce the law (which he acknowledges in his blog) and in that case that meant physically removing the Occupiers and cleaning out the park.
I also know that it's possible to move up in the world. I grew up in a not-too-priviledged environment. I won't go into the details, but my college was paid on a combination of scholarships and grants (until I lost the grant because I made too much in a below-minimum wage job). I have worked at one job or another (and sometimes two at the same time) since 1973. My father taught me that there is always a job available for someone who was willing to work. This past weekend, I heard that Scheider National Trucking needs to hire 41,000 and Pizza Hut needs to hire 28,000. These may not be jobs that people want or may not pay as much as their last job, but they are jobs. And they pay at least minimum wage.
I decided sometime back to adopt the slogan "Think Globally, Act Locally." What that means to me is to elect the kind of representatives who push an agenda of personal responsibility. I believe this is the only way (if there's a way) to fix our national problem. By encouraging people to work, even at low-paying jobs, to pay off debts and to support the family, politicians begin encouraging a way out. As for acting locally, charity begins at home, helping the people in your community. I can't help Mr. Meighan in LA, but I can help the single lady in our church who sells real estate and hasn't sold any in a while. I can help the people who will come to me in February through April to file their tax returns (without charging them) so they can get the refunds and credits that are available under current law. I can help the couple whose husband is in a wheel chair and unable to work.
So while I understand the Occupy movement, I can't say I agree with it. I believe that instead of protesting, the occupiers would be better of returning to work and starting their own personal recovery. That's my thoughts, what are yours?
Thursday, October 20, 2011
The 9-9-9 tax and the flat tax
Herman Cain has gotten a lot of attention for his 9-9-9 tax plan. I've looked into one part of the plan and decided I can't support it. Your responses are appreciated.
The plan is close to the Fair Tax that was discussed a few years ago. I confess, I didn't study the Fair Tax as I felt it had near-zero chance of being passed. I was forced to go look at it some. From what I've read the 9-9-9 plan has not laid out all the details and someone pointed me to the "prebate" part of the Fair Tax for more information.
The problem is that low income people today pay no income tax and will be forced to pay sales tax under 9-9-9. This additional burden on low income people would be offset (under the Fair Tax) by a "prebate", money given to them at the beginning of each month.
However, there is no mention of what happens to the current EITC and it appears to be eliminated. For those unfamiliar, the EITC is a refundable tax credit given to low income workers. The amount of the credit is based on the family size and the amount a person works. As the person's income increases, the EITC increases until it reaches a mid-point. Then it decreases, slower than the increase, until it gets to zero. Think of a standard curve, slightly skewed to the right.
EITC has been touted as "workfare, not welfare" because it encourages people to work. If the person has no earned income, they have no EITC. None other than conservative President Ronald Reagan pushed this program. You may not think the EITC is fair or that some people pay no income tax is not fair, but that's not part of my discussion today. Today, the EITC is the law and it gives low income workers additional cash. Taking that away may be revenue neutral to the government, but not to individuals.
Any tax plan that involves eliminating the EITC should include a plan (tax or otherwise) to address program. If a candidate decides not to replace it, he/she should clearly state that.
The plan is close to the Fair Tax that was discussed a few years ago. I confess, I didn't study the Fair Tax as I felt it had near-zero chance of being passed. I was forced to go look at it some. From what I've read the 9-9-9 plan has not laid out all the details and someone pointed me to the "prebate" part of the Fair Tax for more information.
The problem is that low income people today pay no income tax and will be forced to pay sales tax under 9-9-9. This additional burden on low income people would be offset (under the Fair Tax) by a "prebate", money given to them at the beginning of each month.
However, there is no mention of what happens to the current EITC and it appears to be eliminated. For those unfamiliar, the EITC is a refundable tax credit given to low income workers. The amount of the credit is based on the family size and the amount a person works. As the person's income increases, the EITC increases until it reaches a mid-point. Then it decreases, slower than the increase, until it gets to zero. Think of a standard curve, slightly skewed to the right.
EITC has been touted as "workfare, not welfare" because it encourages people to work. If the person has no earned income, they have no EITC. None other than conservative President Ronald Reagan pushed this program. You may not think the EITC is fair or that some people pay no income tax is not fair, but that's not part of my discussion today. Today, the EITC is the law and it gives low income workers additional cash. Taking that away may be revenue neutral to the government, but not to individuals.
Any tax plan that involves eliminating the EITC should include a plan (tax or otherwise) to address program. If a candidate decides not to replace it, he/she should clearly state that.
Monday, July 11, 2011
Tax on corporate jets
I've been told that I have a mind like a steel trap - it's just that sometimes, it won't open (somehow, I don't think that was intended like a compliment). But this talk about a tax or corporate jets has been stirring around in my mind lately and it has sounded vaguely familiar. After a little research using my favorite search engine, I found the Omnibus Budget Reconciliation Act of 1900 (OBRA-90).
Republicans and Democrats will remember OBRA-90 as the bill where President George H. Bush broke his "No new taxes" promise. According to this Connecticut Law Tribune article, it included "a new luxury tax on luxury autos, aircraft, jewelry and yachts." The thinking at the time was we can stick it the rich and make them pay dearly for those luxuries. After all, it would be fair, they have more money, why should they be spending it on frivolous items, when poor people can't buy gas and food? Not only would it stick it to rich, it would provide more tax revenue for the government to give to the folks who could buy gas and food.
However, the luxury tax didn't work out quite as well as expected - it "took in less than one half of the projected income." People who previously could afford these luxuries simply stopped buying them or - even worse - bought them overseas. "Boat Builders ... were particularly hard-hit with yacht sales dropping 77 percent and builders laying off an estimated 25,000 people." Wait a minute! A tax increase caused job losses? 25,000 of them? I thought the luxury tax was supposed to stick it to the rich? Instead, 25,000 boat builders, average middle class people, lost their jobs? Who'da thunk it?
Any new taxes on corporate jets is likely to have the same effect. Anyone who proposes these taxes needs to look back to recent history and explain why they think this time will be any different. Oh, by the way, OBRA-90 also "included the Budget Enforcement Act of 1990 which established the "pay-as-you-go" or "PAYGO" process for discretionary spending and taxes." (source) and we all know how well that has worked.
Side notes: I found out that none-other than Lion of the Senate Ted Kennedy supported the luxury tax (no surprise), then when his home state of Massachusetts was affected, tried to reverse course with the Kennedy Boat Building Investment Act of 1999. (can anyone say flip-flop?). I do not know if he was successful. I also found this George Will commentary written in 1999. In it, he said "But perhaps every quarter-century or so government--it cannot help itself--must go on a fairness bender, the memory of the hangover from similar misadventures having faded." - Let's see, the last time was 1990, this is 2011 - that's only 21 years. Maybe the cycle is shortening due to Global Warming....
In full disclosure I have to document that I have never owned a luxury car or yacht and never owned a corporate jet. I did own a canoe for a few years, but after it flipped on me once I decided to sell it. I think I had a net loss of $50 on the purchase/sell over a 3 year period. I did not claim the loss on my taxes.
Republicans and Democrats will remember OBRA-90 as the bill where President George H. Bush broke his "No new taxes" promise. According to this Connecticut Law Tribune article, it included "a new luxury tax on luxury autos, aircraft, jewelry and yachts." The thinking at the time was we can stick it the rich and make them pay dearly for those luxuries. After all, it would be fair, they have more money, why should they be spending it on frivolous items, when poor people can't buy gas and food? Not only would it stick it to rich, it would provide more tax revenue for the government to give to the folks who could buy gas and food.
However, the luxury tax didn't work out quite as well as expected - it "took in less than one half of the projected income." People who previously could afford these luxuries simply stopped buying them or - even worse - bought them overseas. "Boat Builders ... were particularly hard-hit with yacht sales dropping 77 percent and builders laying off an estimated 25,000 people." Wait a minute! A tax increase caused job losses? 25,000 of them? I thought the luxury tax was supposed to stick it to the rich? Instead, 25,000 boat builders, average middle class people, lost their jobs? Who'da thunk it?
Any new taxes on corporate jets is likely to have the same effect. Anyone who proposes these taxes needs to look back to recent history and explain why they think this time will be any different. Oh, by the way, OBRA-90 also "included the Budget Enforcement Act of 1990 which established the "pay-as-you-go" or "PAYGO" process for discretionary spending and taxes." (source) and we all know how well that has worked.
Side notes: I found out that none-other than Lion of the Senate Ted Kennedy supported the luxury tax (no surprise), then when his home state of Massachusetts was affected, tried to reverse course with the Kennedy Boat Building Investment Act of 1999. (can anyone say flip-flop?). I do not know if he was successful. I also found this George Will commentary written in 1999. In it, he said "But perhaps every quarter-century or so government--it cannot help itself--must go on a fairness bender, the memory of the hangover from similar misadventures having faded." - Let's see, the last time was 1990, this is 2011 - that's only 21 years. Maybe the cycle is shortening due to Global Warming....
In full disclosure I have to document that I have never owned a luxury car or yacht and never owned a corporate jet. I did own a canoe for a few years, but after it flipped on me once I decided to sell it. I think I had a net loss of $50 on the purchase/sell over a 3 year period. I did not claim the loss on my taxes.
Tuesday, February 15, 2011
Should I itemize on my taxes?
One of the most frequent questions I get from the folks who come to me to have their taxes done is "Should I itemize?" A lot of these clients don't even know what the question means, but they ask anyway. And the answer I always give is that we will look at their situation and determine the best answer, because the answer is different for everyone.
To explain what it means, the IRS gives everyone a standard deduction. You can choose to take the standard deduction or itemize. Typically, you will choose which ever gives you the best tax break (while it sounds silly, there is at least one good reason not to choose the best, but I'll ignore that for now). This deduction is the amount of your income that is not taxable. Supposed you're single and make $50,000 a year income. You won't have to pay taxes on the entire income, the first $5700 is not taxable.
The standard deduction as mentioned about is $5700 for single people or for married people who file separately. For married people who file together, the deduction is exactly twice the single deduction or $11,400. There is another class of people, Head of Household and their deduction is $8400. I won't go over those choices in this blog post, I'll assume you know which filing status you fall into.
In order to decide on itemizing, you can simply look at your items and see the total. If they total more than the standard, you're better off itemizing. So what items are significant? My experience is that home mortgage interest is typically the larges. If your home is mortgaged, you should get a from from your bank that tells how much interest you paid.
People of faith also tend to have charitable contributions. And of course we all pay state taxes, you can choose to deduct your state income tax or state sales tax. Don't forget real estate taxes and property taxes on your automobiles. If the total of all of these items exceeds the standard, by all means itemize.
There are two other areas that are common: Medical expenses and miscellaneous deductions. Each of these is subject to some minimums. For example, medical expenses that exceed 7.5% of your income are deductible. For the person listed above making $50,000, that's $3750. If your expenses are less than that or are covered by insurance, you can't deduct them. If your expenses are higher, you can only deduct the difference. For example, if your expenses are $5000, you can only deduct $1250.
For miscellaneous expenses (job travel, union dues, etc), these have to exceed 2% of your income.
I purposely omitted Casualty and Theft losses as they aren't that common. By all means you should study the law yourself and not take my comments as always true. But hopefully, this will help you decide if you want to itemize.
To explain what it means, the IRS gives everyone a standard deduction. You can choose to take the standard deduction or itemize. Typically, you will choose which ever gives you the best tax break (while it sounds silly, there is at least one good reason not to choose the best, but I'll ignore that for now). This deduction is the amount of your income that is not taxable. Supposed you're single and make $50,000 a year income. You won't have to pay taxes on the entire income, the first $5700 is not taxable.
The standard deduction as mentioned about is $5700 for single people or for married people who file separately. For married people who file together, the deduction is exactly twice the single deduction or $11,400. There is another class of people, Head of Household and their deduction is $8400. I won't go over those choices in this blog post, I'll assume you know which filing status you fall into.
In order to decide on itemizing, you can simply look at your items and see the total. If they total more than the standard, you're better off itemizing. So what items are significant? My experience is that home mortgage interest is typically the larges. If your home is mortgaged, you should get a from from your bank that tells how much interest you paid.
People of faith also tend to have charitable contributions. And of course we all pay state taxes, you can choose to deduct your state income tax or state sales tax. Don't forget real estate taxes and property taxes on your automobiles. If the total of all of these items exceeds the standard, by all means itemize.
There are two other areas that are common: Medical expenses and miscellaneous deductions. Each of these is subject to some minimums. For example, medical expenses that exceed 7.5% of your income are deductible. For the person listed above making $50,000, that's $3750. If your expenses are less than that or are covered by insurance, you can't deduct them. If your expenses are higher, you can only deduct the difference. For example, if your expenses are $5000, you can only deduct $1250.
For miscellaneous expenses (job travel, union dues, etc), these have to exceed 2% of your income.
I purposely omitted Casualty and Theft losses as they aren't that common. By all means you should study the law yourself and not take my comments as always true. But hopefully, this will help you decide if you want to itemize.
Sunday, January 16, 2011
Fist Time Home Buyer's Tax Credit - Payback Time
If you're one of the people who bought a home in 2008 and received the $7,500 tax credit it's payback time. (For those who purchased in 2009 or 2010 and received the $8,000 credit, this does not apply, as long as you still own the home). The original First Time Home Buyer's Tax credit was actually a loan. The $7,500 has to be paid back over 15 years, starting this year.
The loan is interest fee, so you only have to pay back $500 each year. Form 5405 contains instructions for the payback. You also have to pay back the credit (either $7,500 or $8,000) if you keep the house less than three years. In this case, the amount is due back in the tax year that you sold the house. The amount of repayment is limited to any gain you might have on the sale of the home. Some other exclusions apply, but read the form and instructions for full details.
It may seem unfair to the 2008 home buyer that he only received $7,500 and has to pay it back while the 2009 or 2010 home buyer received $8,000 and he gets to keep it. Fair or not, that's the tax law. It's possible that congress would change to law to forgive the $7,500 loan, but my guess is, it won't. The current congress is more interested in reducing the debt than helping one small group of taxpayers. The realtors who fought so hard for the credit have now moved on to new buyers and aren't likely to fight for a tax break for the buyer from three years ago.
One bit of good news is that the $7,500 was real money. If you had taken that money and invested in a small CD making 2% interest (I know that's hard to find now, but let's assume), you would end up with over $2,000 at the end of the payback time. Of course, the intent of the tax credit was to stimulate the economy, so it's better if you actually spent that money instead of bankrolling it.
The loan is interest fee, so you only have to pay back $500 each year. Form 5405 contains instructions for the payback. You also have to pay back the credit (either $7,500 or $8,000) if you keep the house less than three years. In this case, the amount is due back in the tax year that you sold the house. The amount of repayment is limited to any gain you might have on the sale of the home. Some other exclusions apply, but read the form and instructions for full details.
It may seem unfair to the 2008 home buyer that he only received $7,500 and has to pay it back while the 2009 or 2010 home buyer received $8,000 and he gets to keep it. Fair or not, that's the tax law. It's possible that congress would change to law to forgive the $7,500 loan, but my guess is, it won't. The current congress is more interested in reducing the debt than helping one small group of taxpayers. The realtors who fought so hard for the credit have now moved on to new buyers and aren't likely to fight for a tax break for the buyer from three years ago.
One bit of good news is that the $7,500 was real money. If you had taken that money and invested in a small CD making 2% interest (I know that's hard to find now, but let's assume), you would end up with over $2,000 at the end of the payback time. Of course, the intent of the tax credit was to stimulate the economy, so it's better if you actually spent that money instead of bankrolling it.
Saturday, January 08, 2011
To itemize or not to itemize - that is the question
Ok, I'm not a poet. But someone asked me about itemizing deductions this week and I couldn't resist the title. So, should you itemize your deductions on your taxes? As always, the easy answer is "it depends."
For couples who file jointly, are under 65 and are not blind, the standard deduction is $11,400. That means you have to have deductions higher than $11,400 to make itemizing worthwhile. What can be itemized? Mortgage interest, state and local taxes (income tax or sales tax - but not both), real estate taxes, taxes on a new motor vehicle and gifts to charity are fully deductible. If these total up (or come close to) your standard deduction, then itemization makes good sense. In SC, taxes aren't high enough to force the issue alone, so mortgage interest and charitable giving usually are the factors that answer the question.
There are other deductions too. Medical and dental expenses that exceed 7.5% of your adjusted gross income is deductible. That sounds hard, but start by taking a look at your income and multiply by .075. If your medical expenses are more than that, proceed, if not, just let them go.
Years ago, someone told me you could deduct shoe polish. The logic was you polished your shoes for work, so it was a job expense. While I would question shoe polish under any circumstance, job expenses have to exceed 2% of your adjusted gross income. Most people that have a job that requires polished shoes have a high income and shoe polish won't come up to that much money.
By all means you should do the math every year to see if itemization helps you. Some people worry about being audited. My advise follows Will Rogers' saying "I'm happy to be an American and happy to pay my taxes. But I could be a lot happier for a lot less money." In other words, don't worry about being audited, do what's right, document your numbers and take every deduction that is legally allowed.
So what do you think? Will you itemize this year?
For couples who file jointly, are under 65 and are not blind, the standard deduction is $11,400. That means you have to have deductions higher than $11,400 to make itemizing worthwhile. What can be itemized? Mortgage interest, state and local taxes (income tax or sales tax - but not both), real estate taxes, taxes on a new motor vehicle and gifts to charity are fully deductible. If these total up (or come close to) your standard deduction, then itemization makes good sense. In SC, taxes aren't high enough to force the issue alone, so mortgage interest and charitable giving usually are the factors that answer the question.
There are other deductions too. Medical and dental expenses that exceed 7.5% of your adjusted gross income is deductible. That sounds hard, but start by taking a look at your income and multiply by .075. If your medical expenses are more than that, proceed, if not, just let them go.
Years ago, someone told me you could deduct shoe polish. The logic was you polished your shoes for work, so it was a job expense. While I would question shoe polish under any circumstance, job expenses have to exceed 2% of your adjusted gross income. Most people that have a job that requires polished shoes have a high income and shoe polish won't come up to that much money.
By all means you should do the math every year to see if itemization helps you. Some people worry about being audited. My advise follows Will Rogers' saying "I'm happy to be an American and happy to pay my taxes. But I could be a lot happier for a lot less money." In other words, don't worry about being audited, do what's right, document your numbers and take every deduction that is legally allowed.
So what do you think? Will you itemize this year?
Subscribe to:
Posts (Atom)