May 6, 2009

Big Fat Tax Refund

The other day I updated my net worth and I mentioned in there that our cash assets were up significantly primarily due to a big fat tax refund. We're getting over $9,000 back this year. I got married this year so our tax circumstances were abnormal.

A big reason our tax refund was so high was that I didn't adjust my W-4 withholding to reflect the change in marital status. So they withheld taxes as if I was single the whole year. Another major reason we had a large refund is that we donated a lot of household goods to charity. When my wife moved in with me we had a lot of unnecessary, duplicate 'stuff' to get rid of. And we also took the opportunity to clear out our closets. That gave us a pretty large charitable deduction. Also we had two homes for part of the year and paid mortgage and property tax on both so we had extra deductions from that. None of this was planned. Its also not stuff that will occur in future years. The only 'mistake' I made was not changing my W-4 sooner but that would have only reduced the refund a bit.

A couple other factors that lead to the lower tax bill were sale of stock that resulted in a loss and our rental property depreciation. The depreciation on our rental property gives us a good tax shelter. This year we had over $8000 in depreciation to deduct. Stock sales and rental depreciation are things we'll have again in the future. Usually stock sales will show a gain, but I might have losses in the future too. I could manage that a bit more to try and maximize the tax consequences. But I don't think theres much opportunity to juggle that to an advantage. Overall stock and rental income elements will be variables in our annual taxes. Mostly they should be gains but some years they will be down.

In future years our tax situation should stabilize and be more predictable overall. I don't expect to get large refunds like this again.

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