Posted on

Just a few thoughts on itemizing and deductions

I know, another boring post about money and taxes, but stick around you might learn something.

The answer to the “should I itemize?” question is actually pretty simple: if you don’t have enough deductions to surpass the standard deduction then you don’t itemize. You take the larger of the two and be done with it because that’s what benefits you the most. Note for the married folks, if you file separately and one of you itemizes then the other has to too.

The standard deduction is great for people with very little to deduct and itemizing is great for people with lots to deduct. Once you get in the situation where your total itemized deductions are close to your standard deduction then things like the mortgage interest deduction aren’t really that valuable. The mortgage interest deduction is touted as one of the benefits of home ownership, but people like me wouldn’t benefit at all from it.

In our situation, if we owned a home we’d have to hand the bank around $6,000 in interest every year and pay $3,000 in property tax to simply break even with the standard deduction. It’s only after the $10,700 threshold that each additional $1 deduction would benefit from itemizing. Even then I’d only be getting about 20% of that back, so what is the benefit of giving away $9,000 a year and then spending $1 to get back $0.20 after that. In the future, the standard deduction will increase with inflation and we’d gradually pay less interest over the life of a mortgage making it less likely that we’d be over the standard deduction. So whenever I hear someone talk about the tax benefits of owning a home, I take it with a big grain of salt.

Most Americans Don’t Itemize on Their Tax Returns gives a pretty good break down of who itemizes. Those individuals with higher incomes have a greater incentive to itemize because the deductions are more valuable as you move up the tax bracket ladder and this is certainly reflected in the itemizing rates.

I did hear about a proposal to add an additional $1,000 to the standard deduction for people with mortgage interest that don’t itemize. Can’t find anything through Google right now so post a link if you know what I’m talking about.

Posted on

Tax Time 2008: Free TurboTax Deluxe From State Farm Again

Last year State Farm offered free TurboTax with federal and state e-filing to all of its customers. This year they continued that offer, but limited it to their banking customers which excluded me as an insurance only customer. When I found out I applied for one of their credit cards and the other night I got it added to my State Farm account. Logged in and the link to sign up for TurboTax appeared. Yeah free filing again this year.

There was some uproar from TurboTax customers this year when Intuit tried to introduce a $10 fee to just print more than one return. You got the first federal e-file free, you could print a state return or pay to e-file it, but then any other return you wanted to do would cost $10 to simply print. People were just absolutely hammering on them in reviews. They saw their error and now you get 5 free federal e-files and you can print as many other returns as you want. If I was paying for it I might have considered switching to TaxCut.

If I can get into H&R Block’s TaxCut to do a test return I might post some of my impressions and compare the two packages.

Posted on

2008 Tax Time: Amending my 2007 return with Form 1040X

Posted the other day about the Saver’s Credit which caused me to do a quick return review. Turns out I didn’t report my Roth IRA contributions on Form 8880 on last year’s return. My 457 contributions were on there, but they were below the $2,000 limit so I didn’t get the full credit. I can get an additional $90 back if I amended my 2007 return and included those Roth contributions.

My returns have been fairly simple since I started working and have never had to amend a return. The process is fairly simple once you understand the forms involved. The 1040X is used to explain the differences between your original return and your amended numbers. Since the increased credit only changed a few lines it was easy enough to fill out by hand. I filled out an updated 1040 and 8880 with the correct numbers and double checked everything. Just need to send it in and I should have my $90 in a month or so.

Amending a return isn’t a horrible experience, but it is a little time consuming. It took me almost 3 hours to figure everything out and get the forms reprinted. I almost didn’t bother with the amended return thinking it wouldn’t be worth the effort. If the difference was lower then I might not of, but $90 isn’t an insignificant amount of money. For 2008 I’ll be a little more careful and double check the actual forms before e-filing to avoid amending another return. TurboTax does a pretty darn good job of filling all the forms out, but I know my tax situation best and what strategies to use.

Posted on

Tax Time 2008: Retirement Savings Contributions Credit and IRAs

Now that we’re in 2009, it’s not a bad idea to start thinking about 2008 taxes. I don’t expect anything to be drastically different this year, but there are a few things I’m going to be looking at this year.

Credit for Qualified Retirement Savings Contributions
Form 8880 – TurboTax filled this in for me last year and I didn’t even know about it until I read more about it this year. In 2008, if you are filing jointly and have an Adjusted Gross Income (AGI) of less than $53,000 then you can receive a tax credit on a portion of your contributions to an IRA or retirement plan. Last year we were low enough to get the 10% credit on up to $2,000 of our contributions. Lower incomes receive a higher percentage back. Remember, tax credits > deductions.

Doesn’t sound like a big deal, but it’s actually a pretty good deal for those with lower incomes since the credit is a straight up reduction of your total tax bill. If you contribute to a Traditional IRA, you get the deduction there that brings your AGI down and then on top of that you get anywhere from $200-$1,000 back. The income limit for the 50% credit is low ($16k single, $32k joint), but if your income is in that range then you’d definetely want to contribute $2,000 to a Traditional IRA before April 15, the deadline for making 2008 IRA contributions. If you were in that situation you’d be able to put $2,000 away for retirement, reduce your AGI by $2,000 and get $1,000 slashed off your tax bill. I could see people in that situation paying $0 in Federal taxes when combined with other deductions and credits.

IRA Rollovers
I never rolled my SIMPLE IRA (money market funds) from my old job over to Vanguard and now would be a great time to do it considering equity prices are down. If I rollover into a Roth IRA then I pay taxes on the whole thing. I’ll only do that if we’re over the $53,000 limit for the Savings Credit and I can’t get my AGI under that with contributions to Sarah’s Traditional IRA. If I roll into my Roth I’ll eat the taxes this year and then roll Sarah’s into a Roth next year and be done with Traditional IRA’s for the foreseable future.

Traditional IRA deduction limits
And the reason I’m moving away from Traditional IRAs is the fact that we’ll eventually both be participating in employer sponsored retirement plans. If we are both active in an employer plan, then the Traditional IRA deduction starts to phase out at a modified AGI of $83,000. Once that phase out hits it makes sense to put money into a Roth IRA because of tax advantages and the fact that non-deductible contributions in a Traditional IRA really complicates things. Remember, Roth IRA contributions > Non-deductible Traditional IRA contributions.

So that’s just some of the stuff I’m going to be dealing with this year. I’ve still got a lot to learn, but it is nice to finally learn the ropes and be more aware throughout the year of things that affect our taxes. This year I’m getting the wife involved and she will be sitting down in front of TurboTax and filling out our return with my help. What do you think, should I add tax geek to my list of geekdoms?

Posted on

Rebate checks coming sooner than expected

The IRS is actually ahead of schedule and will be sending checks or direct depositing the stimulus money pretty soon. Don’t Mess With Taxes has the full schedule available. It will be interesting to see what people actually do with the money. I don’t expect it to do much even if a significant portion of people just spend it on consumer items. I doubt that will happen and good amount of the money will go to paying off debt and day to day expenses. Our check is probably going straight into savings where it will stay for the foreseeable future. Anybody have plans for their rebate check?