Showing posts with label taxes. Show all posts
Showing posts with label taxes. Show all posts

April 24, 2014

The Marriage Tax Bonus

You've probably heard of the Marriage Tax Penalty.    Have you heard of the Marriage Tax Bonus?

Most married couples receive a Marriage Tax BONUS rather than a penalty.

My wife and I pay a lower tax bill then I would pay if I was single.   Since my wife doesn't work we get a lower tax rate and higher deduction and exemption.   This is generally the case for a married couple with only one income earner.   This gives us a Marriage Tax Bonus of several thousand dollars a year.

Lets look at a couple examples.

Say you make $50,000 and you're single.   Your basic tax bill would be $5,929.   If you get married and your spouse does not work then your taxes would be $3,608.   The Marriage Tax Bonus is the difference or $2,321.
If you make $100,000 then the single filer tax bill would be $18,493 and married would be $11,858.    Thats a Marriage Tax Bonus of $6,635.

 A single income couple is going to cause the largest Marriage Tax Bonus.   For married couples with two incomes there may be a bonus or there can be a penalty.  It depends on the income levels and resulting tax brackets before and after marriage.

The TaxPolicyCenter said :
"Before the 2001 tax act, married couples were already significantly more likely to get bonuses than penalties. The Congressional Budget Office estimated that 51 percent of married couples received marriage bonuses totaling nearly $33 billion in 1996, and 42 percent incurred marriage penalties totaling almost $29 billion."

But note that is before the 2001 tax act.   The 2001 tax act changed things to remove the penalty for the lower tax brackets.   After that 2001 reform the % of people getting bonuses should be even higher.   So now the % of people getting a marriage bonus is above 51%.

To roughly figure if you have a Marriage Tax Bonus or a Marriage Tax Penalty you can use the calculator at the Tax Policy Center.


March 4, 2014

FREE after rebate - HR BLock Deluxe & Total Defense Premium Internet Security

Go to TigerDirect : 
H&R Block Tax Software 13 Deluxe and Total Defense Premium Internet Security Bundle

The bundle cost is $59.99 and you can then get a $60 rebate making it free after rebate.   Deadline for the rebate is 3/31.

The rebate form is here.    You DO have to jump through a couple hoops to qualify for the rebate.   You have to register and sign up for the Total Defense account.   That requires registering and activating the software and giving them a credit card.    However you can then cancel the account at any time and they won't bill you anything.      You do not need to actually install the Total Defense software if you don't want to and you probably should not do so if you've already got virus software.  (if you don't already have virus software then you should get some)

But if doing that is worth it to you then you can get a free copy of H&R block Deluxe in the deal.

I used a similar rebate deal with Total Defense via Tigerdirect in the past and it worked fine.  I registered and got the rebate then canceled Total Defense after the fact.  

--This article may contain referral links which pay this site a commission for purchases made at the sites.

February 25, 2014

What Percent of People Historically Receive a Refund versus Owe Taxes

Most people get a refund on their taxes in any given year.    Generally speaking around 80% of people filing taxes get a refund.

I found the historical IRS tax data going back to 1950 showing who gets refunds versus who owes taxes.

Here's a chart of the trend from 1950 to 2011 from the current IRS data set :

I am sure there are various things that drive the longer term trends.    IRS tax withholding processes have undoubtedly evolved over the decades.   Things like more dual income households may impact it as well.    The introduction of earned income tax credits may have increased refund rates as well.

The green line indicates people who get neither a refund nor owe money.  I'm assuming thats mostly for people who had no money withheld but owed nothing.   Maybe people like retirees on social security and minimal other income.


February 13, 2014

How Many People Claim Itemized Deductions? What and How Much Do People Deduct?

I got the data from IRS taxstats.  The most recent data on Tax stats site is from 2011.    Specifically Individual Complete Report (Publication 1304), Table 2.1

46,293,834 returns claimed itemized deductions in 2011.  

If you add it all up, theres over $1.2 trillion in itemized deductions.  

If the 46 million filers instead claimed a $6100 single deduction they'd have $282 B in deductions and its likely more than that since many itemizers are married or heads of households.    The standard deductions would be somewhere between $282B and $564B.

Over 2/3 of the amount deducted is for taxes and homeownership.   I broke down the total deductions into major categories and here's how they stack up :

I put the deduction for real estate property taxes into its own category of home/tax as its both a homeowner related deduction and a tax deduction.

Here's the break down first ranked by the total people claiming the deduction  :

deduction # returns $ billion
Real estate
40.1 $173
Home mortgage interest 36.0 $364
34.6 $139
state/local income tax 33.7 $266
Other than cash
22.5 $44
Tax preparation
22.1 $7
Personal property
19.9 $8
Unreimbursed employee
business expenses
14.7 $77
state/local sales tax 10.9 $16
Medical and dental expenses deduction 10.4 $44
Other limited
miscellaneous deductions  
7.9 $38
Qualified mortgage
insurance premiums
4.5 $5
Deductible points 2.7 $1
2.6 $2
Investment interest
expense deduction
1.5 $13
Gambling loss
0.9 $18
Miscellaneous deductions
other than gambling
0.4 $2

And next sorted based on the dollar value of the total amount deducted :

deduction # returns $ billion
Home mortgage interest 36.0 $364
state/local income tax 33.7 $266
Real estate
40.1 $173
34.6 $139
Unreimbursed employee
business expenses
14.7 $77
Medical and dental expenses deduction 10.4 $44
Other than cash
22.5 $44
Other limited
miscellaneous deductions  
7.9 $38
Gambling loss
0.9 $18
state/local sales tax 10.9 $16
Investment interest
expense deduction
1.5 $13
Personal property
19.9 $8
Tax preparation
22.1 $7
Qualified mortgage
insurance premiums
4.5 $5
Miscellaneous deductions
other than gambling
0.4 $2
2.6 $2
Deductible points 2.7 $1


January 23, 2014

Limits on Rental Property Income Tax Loss Deductions

You may have heard that rental properties can have some good tax deductions.    One of the major deductions is the depreciation of the property which can add up to a lot of money.    So owning rentals can be advantageous from a tax perspective.   However you may not know that there are limits on how much you can deduct in rental losses or if you can even deduct a loss at all.

We actually ran into this ourselves last year on our taxes.   We had about $9000 total loses that exceeded the amount we were allowed to deduct for the year.

Hows this all work then?    The article Can You Deduct Your Rental Losses? from NOLO covers the topic pretty well.    I'm not going to reinvent the wheel here by rewriting their whole article.   I'd recommend you read the NOLO article yourself.

I'll summarize quickly though: 

  • There is a $25,000 limit on passive losses that you can deduct.  Generally rentals are considered a passive income.   Maybe you don't think its 'passive' considering the amount of work you do but it is in that category according to the IRS.    
  • However if you make over $100,000 MAGI for a couple then that $25,000 deduction limit is phased out.   Above $150,000 and you get no deduction for losses.    Keep in mind the losses we're talking here are the net number out of a Schedule E so it means your total rent minus all expenses.   
  • Real estate professionals get an exception.  To qualify you have to work minimum 751 hours in the year in the real estate business and materially participate in running your properties.

But all is not lost.   For any loss you're not allowed to deduct you can carry it over into future years.   The IRS says: "Generally, losses from passive activities that exceed the income from passive activities are disallowed for the current year. Disallowed passive losses are carried forward to the next taxable year."


January 20, 2014

Get Extra 10% Bonus from TurboTax When You Use Income Tax Refund to Buy Amazon Gift Card

Here's the deal in short.   If you use TurboTax to file your income tax refund they will give you the option to use some or all of your refund to buy an gift card.    If you do so then they'll kick in another 10% bonus gift card on top of that.    So for example if you are due $2000 and use $500 to buy an Amazon GC then you'll get another extra $50 gift card.

Here is the page on Amazon about the deal.

You can also get $10-15 off of TurboTax if you're a Prime member.

"Prime Members save as much as $10-$15 more on TurboTax 2013. Limited time offer. See product detail page for more information.'

If you're not a member you can  sign up for Prime

Details on the 10% gift card offer...

I copy pasted the details & fine print below.

  • Use some (or all) of your federal refund to purchase an Gift Card** and Turbo Tax will tack on a bonus
  • The remainder of your refund will be deposited to your bank account
  • As soon as your refund is received, TurboTax will email you your Gift Card claim code
  • Receive an extra 5% with TurboTax Basic – So $500 would become $525
  • Receive an extra 10% with TurboTax Deluxe, Premier, and Home & Business – So $500 would become $550
  • TurboTax Business is not eligible for this offer
* Gift Card offer is for federal refunds only. Limits apply ($2000 per e-card, maximum $10,000 per customer). Offer available only for TurboTax Online or CD/download versions sold and shipped, or downloaded directly from Intuit or Amazon. See here for full details.
** is not a sponsor of this promotion. Gift Cards ("GCs") sold by Intuit, an authorized and independent reseller of Gift Cards. Except as required by law, GCs cannot be transferred for value or redeemed for cash. GCs may be used only for purchases of eligible goods at or certain of its affiliated websites. For complete terms and conditions, see GCs are issued by ACI Gift Cards, Inc., a Washington corporation. All Amazon ®, ™ & © are IP of, Inc. or its affiliates. No expiration date or service fees.”

--This article may contain referral links which pay this site a commission for purchases made at the sites.

Free TurboTax online for Low Income

If your household income is under $30,000 AGI or you're in the military then you can use TurboTax online for free.

They offer the TurboTax Taxfreedom Edition.

You may also qualify for free filing for your state taxes in the following states : 

For full details visit the TurboTax Taxfreedom page.

-- This article may contain referral links which pay this site a commission for purchases made at the sites.

January 14, 2014

Alternative Minimum Tax (AMT) is Not a Bonus Penalty Tax

Have you heard someone who has to pay AMT for the first time talk about AMT?    They act as if they're being punished with a penalty tax.   "Oh no, I made too much and now I have to pay AMT!" is how the complaint usually sounds.   AMT is not really an extra tax paid as a penalty simply because you made a lot of money.   We already have tax brackets setup that cause higher taxes for higher income.  AMT is not a extra tax either in the sense that they don't simply say "oh you made too much money so you have to pay $1000 more" as some people seem think.   It is an alternative way to calculate taxes to set a minimum tax, hence the name.   What in effect AMT does is basically disallow some deductions and credits then figure a different tax calculation of basically 26-29% tax rate after a large exemption.

First lets go back and review some basic info on AMT that I've written before.  In an old article from 2008  What is the Alternative Minimum Tax (AMT) and how does it work?  I gave a basic discussion of the tax.  That article is now a bit dated since the numbers have changed but the basic idea is the same.  Who Pays the Alternative Minimum Tax (AMT)? I discussed how only around 2-3% of people pay it and almost all of them have AGI over $200k.

The key word in Alternative Minimum Tax is MINIMUM.   Its not the Maximum tax.    Its a minimum tax rate.      The AMT tax rate is LOWER than the standard tax rate with standard deductions.

Here's how it works.   First you figure your taxes normally.   You take your income then subtract any kind of deduction you can claim and calculate your income tax rate based on the progressive tax brackets.  Then you subtract credits you're eligible for.    Thats the normal tax calculations.  But way back people realized that high income folks were finding all sorts of tax loopholes to avoid taxes and ending up paying little in tax.  So they implemented the AMT which simply takes your income, subtracts a large exemption then figures a tax % of the rest.   Then you pay the tax which is higher.   If your normal tax figures are higher than the AMT then you don't pay AMT.  

Lets look at some examples :
I'll use TaxCaster to estimate taxes.   I'll take an example of a single person living in Texas where there is no state income tax.   Lets say you make $200,000 from your job and you own a house.   Your house is pricey and you have a $25,000 interest bill.    For arguments sake lets say that since you just bought the house this year there is no property taxes due this year but you'll have to pay double property taxes next year.       Your tax situation is simply $200k of income and $25k of deductible mortgage interest.   You would owe a tax bill of $41,201 for that year.   OK.  Then the next year you've got that property tax bill due. So in the next year you've got a $25,000 property tax bill (double the normal).   That gives you $200,000 of income plus $50,000 of deductions ($25k mortgage interest + $25k property tax).   Your taxable income is only $150,000 and your regular tax rate works out to $34,201.      BUT here comes AMT.    When you figure the AMT you don't get that property tax and your AMT rate adds another $1,679 to your tax rate for a total tax bill of $35,880.

Situation A :   $200k income, $25k mortgage interest = $41,201 regular tax bill, NO AMT
Situation B: $200k income, $25k mortgage interest, $25k property tax = $35,880 tax bill including $1679 of AMT

Situation B has a lower tax bill and pays AMT.   Would you prefer to pay $41,201 in taxes or $35,880 in taxes?    Thats an easy one.   Clearly $35,880 is cheaper.   Yet the $35,880 tax bill includes AMT?    This tax payer in situation B is "Hit with AMT" yet has a lower tax bill than in situation A.

Now lets say a few years later you are promoted to VP and your income has more than doubled and you now make a whopping $500,000 a year.  You're still paying that $25,000 mortgage interest and again hit with the $25,000 property taxes.   In this situation you would have $500k income and $50k deduction.  Your regular tax bill would be $138,934.   However you would NOT owe any AMT even though $25k of your deductions from property tax is disallowed in the AMT calculation.

Situation A : $200k income = $41,201 tax bill, NO AMT= 20.6% effective tax
Situation B : $200k income = $35,880 tax bill & AMT of $1679 = 17.9% effective
Situation C : $500k income = $138,934, NO AMT = 27.8% effective

Again, lets play dumb and choose between A,B, & C and decide if we want the one with AMT or not.   Situation B has the lowest effective tax rate, and the lowest total tax bill yet they are still paying an AMT. 


January 3, 2014

Half off of H&R Block Tax Software today at Amazon

Amazon has H&R Block tax software half off today.

Here is the link : Gold Box Deal of the Day H&R Block Tax Software

For example you can get the H&R Block Tax Software 2013 Deluxe + State for $21.99

I haven't used the software personally but this seems like a pretty good sale price.

--This article may contain referral links which pay this site a commission for purchases made at the sites.

December 5, 2013

Assets of Millionaires (gleaned from estate tax data)

The IRS has data on estate taxes which breaks down the nature of the assets.   Estate taxes for 2012 the latest year with data is only applicable to estates with over $5 million in value.   Therefore if we look at the estate tax data we can get a sample of the asset mix of multi-millionaires in the US.   The information is going to be skewed towards older people as these are for the estates of deceased people.

Here are the numbers for the 9,412 returns filed in 2012 :

Value % of total
Publicly traded stock 31,868,113 26%
State and local bonds 13,595,957 11%
Cash assets 11,726,706 9%
Other real estate 10,327,985 8%
Closely held stock 9,654,433 8%
Retirement assets 6,631,757 5%
Personal residence 5,908,960 5%
Real estate partnerships 4,495,892 4%
Mortgages and notes 4,298,336 3%
Other limited partnerships 4,015,354 3%
Farm assets 3,729,481 3%
Other noncorporate business assets 2,843,852 2%
Art 2,757,975 2%
Private equity and hedge funds 2,489,808 2%
Corporate and foreign bonds 2,228,937 2%
Other assets 1,931,019 2%
Insurance, face value 1,922,184 2%
Other Federal bonds 1,731,202 1%
Depletables / intangibles 832,080 1%
Unclassifiable mutual funds 814,457 1%
Bond funds 519,606 0.4%
Insurance, policy loans 66,809 0.1%
Federal savings bonds 63,407 0.1%

And here's a graph showing the larger asset groups :

(click image for full size)
Roughly speaking stocks and bonds of various types make up about half the assets.   Looks like real estate including personal homes is around 20% ballpark.   The remaining 30% is a mix of various things.


October 6, 2013

Traditional IRA vs Roth IRA - Which is Better for a 'Typical' Family?

In the personal finance realm it seems that most everyone is hopelessly in love with the Roth IRA.   I've seen people give blanket general advice that everyone should use a Roth IRA for their retirement savings.     There are a lot of scenarios where a Roth IRA is a poor choice.  Don't get me wrong, a Roth IRA is a good way to save for retirement but its not always the most optimal.

Today I'll look at an example of a 'typical family' and see how their retirement will fare if they use a Roth IRA exclusively or if they use a traditional IRA instead.

Assumptions for our 'typical' family:   You make exactly the median income for your age.  In your mid 20's you have 2.3  children (we'll round down for simplicity).   Then lets say you're less typical in that you consistently save a full 10% of your pay towards your retirement and then get a consistent 8% annual growth through fairly smart investing.

I got the income data from the Census.   I'm just assuming you make the median income level of each age group over your life. 

For taxes I'm assuming that the earliest age you're a single person.  Then between age 25 and 44 I'm assuming you're married with two kids.   Then after 45 years old I assumed the kids would be out of the house and you'd be filing as a married couple with no dependents.   I figured the tax bills with the TaxCaster online calculator.   TaxCaster does a good job of figuring all the credits and makes estimating the tax bill pretty easy.

You'll notice the taxes are pretty low during the 25-34 year period.   That is because of child tax credits and the two exemptions for dependent children.    Right now based on current tax laws your marginal income tax bracket would bet 15% for the entire time if you make the median income level for the given age group.

I only got median income levels for 10 year age groups, so that doesn't tell us what a 23 year old or a 46 year old would make.   I estimated the income by age by simply assuming it grew or shrunk steadily.  Here's how the income looks from my modeling :

So we're assuming your income will grow steadily over time due to promotions and increased experience.   In addition to this you will also see wage increases due to basic inflation.   I'm going to also assume a general 3% annual inflation rate.

Now once we have an assumed income pattern over time I can figure out the retirement savings.

I'm going to go with a flat 10% retirement savings rate and also assume 8% annual investment growth.

Based on all these assumptions, I figure that if you start work at age 24 and work until age 65 that you will have accumulated $2,386,085 in a Roth IRA account.

If on the other hand you wanted to save an equivalent amount of post-tax money in a Traditional IRA then you'd be saving about 18% more.   Thats because if you save the money pre-tax then you won't have to pay taxes on it, and at the 15% tax bracket that comes out to about 18% extra money pre-tax.   Now if you save over the same 41 year work history via a Traditional IRA with the same 8% investment growth then you'd have a total of $2,807,158 in your retirement.

Roth : $2,386,085
Traditional : $2,807,158

Of course this is money that is inflated over 41 years so in todays equivalent dollars you'd have less.   Working back with the 3% annual inflation rate todays dollars would be :

Roth : $710,166
Traditional : $835,489

If we assume the 4% annual withdrawal rate then that would give us retirement income in todays dollars of :

Roth : $28,407
Traditional : $33,420

You would also qualify for household social security income of about $24,000.    I used the Social Security quick calculator to estimate the monthly SS payments at full retirement age.  The exact amount of social security will vary based on the exact work history and whether or not you've got one spouse working with $60,000 income or two working spouses making a combined $60,000.  But I'm assuming a $24,000 figure which is in the ballpark of what such a couple will likely get.   Of course this is based on todays Social Security rules which are subject to change.

Roth : $28,407 + Social security : $24,000 = total = $52,407
Traditional : $33,420 + Social security : $24,000 = total =$57,420

With the Roth retirement you'd pay no taxes and none of your social security would be taxable so you'd have a tax bill of $0.   With the traditional IRA you would owe taxes on your withdrawal and you'd be making enough income that some of your social security would be taxable.   You can use the How much of my social security benefit may be taxed? calculator to find out how much of your income is taxable.  That calculator figures  with a $33,420 IRA withdrawal that 30% of your social security would be subject to taxes.  That would give you a total taxable income of $7,200 from social security and $33,420 from the IRA or $40,620.   Taxes for a married couple on $40,620 will run you $1,841.

Roth : $28,407 + Social security : $24,000 = total = $52,407 - $0 taxes = $52,407 net
Traditional : $33,420 + Social security : $24,000 = total =$57,420 - $1,841 = $55,219 net

And there we have it folks. ..   the bottom line.   When all is said and done your net take home after taxes during retirement would be :

Roth : $52,407
Traditional : $55,579

Thats a difference of $3,172 more per year you'd have with the traditional IRA route over the Roth IRA.    This is a boost of 6% to your take home after tax income.

Of course this example has a lot of variables and assumptions and changing any of them could change the picture some.   We don't know what taxes will be like in 40 years.  We don't know how social security will work in 40 years.   We don't know if your income will have a pattern like I'm assuming.  We don't know what inflation will do. We don't know how your investments will grow.   Its all a crap shoot.   But I think the assumptions I'm making are reasonable and based on historical norms.    When projecting estimates like this 40 years into the future thats about the best you can do, make assumptions based on historical averages and use current rules. 


September 17, 2013

How Much Are Health Care Subsidies?

With the implementation of the Patient Protection and Affordable Care Act (PPACA) commonly known as "Obamacare" there will now be tax credit subsidies to help pay for health insurance.   To be eligible you have to buy insurance on your own (outside of employer plans ) and have a family income that is 400% of the federal poverty level or lower. 

Keep in mind this won't impact most people since most people get insurance through their employer or via government programs like medicare or medicaid.   You are only eligible for a subsidy if you buy private insurance via an exchange.

How much are the tax credits available? 

They figure the subsidy based on how much the tax payer is expected to pay for insurance and then the subsidy pays the rest of the cost for a 'silver' level plan. 

In other words :

Subsidy = Cost of silver plan - Tax payer premium

The tax payer premium is a % of their income based on the following table :

Federal Poverty Level % of income
under 133 2%
133 3%
150 4%
200 6.3%
250 8.05%
300 9.5%
400 9.5%

I found the table both at the KFF and in a US News article.

If your income is in between one of those points then there will be a sliding scale.   So for example if you're at 225% of poverty then you'll be halfway between 200 and 250 so your % of income is the midpoint of 6.3% and 8.05% or 7.175%. 

Also refer to the 2013 Federal poverty levels

Abbreviated table :

Persons in family Poverty level
1 $11,490
2 $15,510
3 $19,530
4 $23,550
5 $27,570

Lets say for example that you're a 40 year old single person making $28,725 that would put you right at 250% of the poverty level.  So your premium is 8.05% of your income which is $2,312.36  

Now lets say as an example that a 'silver' level health plan would cost you $4,800 a year.   Therefore the subsidy is $4800 - $2312.36 = $2,487.64


August 20, 2013

Hodge Podge : Tax Estimator, Medical Cost lookup and Median Incomes & Rents

Here are three interesting sites that I've ran across.   They are all useful or interesting.   These were sitting in my pile of stuff to write about but didn't warrant a article on their own so I figured I'd post about them all together...

Estimate Your Tax Bill : TurboTax's TaxCaster This one is pretty useful to figure out your rough income tax bill.   You can also use it to model how different changes would impact your taxes.   Its smart enough to know what you can and can't claim based on your tax levels.

Get Average Medical costs: FairHealth's medical cost lookup
You can look up specific medical procedures by ZIP code.   It gives estimated costs in your area for various procedures and it figures both the insured costs and uninsured costs.

Median Income & Median monthly rents by Census tracts: Rich Blocks, Poor Blocks
You can put in your address and find the median rents in your area.   This is handy for setting rents or market research for rentals.   You can also look up median income levels which is more for curiosity sake.  I found it interesting to see the huge differences in median incomes in various areas of our town.

--This article may contain referral links which pay this site a commission for purchases made at the sites.

July 2, 2013

Limits on Small Estate Sizes to Avoid Probate Rules For Each State

When someone passes away their estate will usually have to go through probate.   Probate is a legal process where the courts officially handle the assets in a legal manner.   Probate can be costly with legal fees and/or a % of the estate gross being charged.   However if an estate is small enough then probate can be avoided.   The threshold on how small an estate has to be to avoid probate varies state to state based on each states law.

The Nolo site has links to each state in their article Small Estate Probate Shortcuts: Why Even Large Estates May Qualify  I went to each individual state page and got the numbers there.    Some of the numbers below are for a 'simple affidavit' and some are for the 'small estate' form of probate.   These are two different ways of either avoiding probate or doing a shortened probate.   They are different but for my purposes here good enough to show the maximum estate value below which you can avoid probate.    A list of state laws is at the Findlaw page State Laws: Estates & Probate

To be clear, this is not even close to legal advice.   If you're going through probate you ought to review your states current laws.   This list is bound to get out of date fast since 50 states tend to change laws once in a while so a couple years form now I bet 1-2 states will have changed it.

If you want the detail for your state then I encourage you to check the Nolo site : Small Estate Probate Shortcuts: Why Even Large Estates May Qualify 

Here is the list by state for assets below which you may be able to avoid probate :

Alabama $3,000
Alaska $15,000
Arizona $75,000
Arkansas $50,000
California $150,000
Colorado $60,000
Connecticut $40,000
Delaware $20,000
D.C. $40,000
Florida $75,000
Georgia no debts*
Hawaii $100,000
Idaho $100,000
Illinois $100,000
Indiana $50,000
Iowa $100,000
Kansas $20,000
Kentucky $15,000
Louisiana ?*
Maine $20,000
Maryland $50,000
Massachusetts $25,000
Michigan $15,000
Minnesota $20,000
Mississippi $12,500
Missouri $40,000
Montana $50,000
Nebraska $30,000*
Nevada $100,000*
New Hampshire spouse/child*
New Jersey $10,000
New Mexico $50,000*
New York $20,000
North Carolina $20,000
North Dakota $50,000
Ohio $35,000
Oklahoma $20,000
Oregon $275,000*
Pennsylvania $25,000
Rhode Island $15,000
South Carolina $10,000
South Dakota $50,000
Tennessee $25,000
Texas $50,000
Utah $100,000
Vermont $10,000
Virginia $50,000
Washington $100,000
West Virginia $100,000
Wisconsin $50,000
Wyoming $200,000

* Theres some details to add per states: Nebraska allows $30k of real property / $50k of personal property, Nevada allows up to $200k if theres no debts, New Mexico allows up to $500k for spouses only, Oregons total is $75k personal and $200k real.   Georgia seems to avoid probate if theres no debts, Nolo didn't have a page for Louisiana and New Hampshire seems to avoid probate entirely for spouses and children.

Some states may allow larger amounts than the figures given above based on circumstances.  The laws can get more convoluted based on various situations.   


June 18, 2013

Do Home Office Deductions Lead to IRS Audits?

I've seen a lot of people claim that taking a deduction for a home office on your taxes is a red flag for the IRS and leads to a higher audit risk.    I've been cynical of that for some reason.    I'm not too sure why I'm cynical about the claim, but I am.    It seems to make sense that the IRS might target deductions that are commonly ... how shall we say it? ... "exaggerated"?   or "embellished"?   But then its hard to see any cause - effect relationship between any given deduction and an audit.   The IRS does not publish any kind of statistics on what percentage of people audited claim specific deductions.   There is no real solid data to support or refute the idea.   It may be impossible then to prove or disprove the idea that any given deduction causes higher audit rates.

I went out to Google and searched for 'home office audit risk' and found several articles discussing the topic.  However there was no consensus with some articles saying theres no evidence of any audit risk and others claiming it as a fact.  

Opinion #1 :   No Evidence

In : Skip home-office deduction to avoid audit?
Mark S. Gleason who is an Adjunct Professor of Accounting at the University of St. Thomas Opus College of Business.

says: "Having worked with many taxpayers who have claimed home-office-expense deductions, I have seen no evidence that taking a home-office deduction creates additional audit risk. I could not prove this statistically."

Opinion #2 : Assumes an audit risk

in First Person: Assessing My Income Tax Audit Risk a 'Yahoo Contributor'
says: "Most tax professionals encourage work from home taxpayers to deduct this expense, as long as it is under, say 10%. IRS does as well, as long as the requirements are met. However, unless I can provide definitive proof, the income tax audit risk appears to outweigh my income tax savings."

But I have no idea where they get that 10% figure from and I"m not sure exactly what its 10% of.

Opinion #3 - States IRS audits people

in Tax tips: How to avoid an IRS audit
 written by Jeff Reeves who's bio on Amazon says he's a journalist

"These deductions were abused for years by people who did a little work in the den in exchange for a lot of tax benefits they might not have deserved. The IRS frequently audits those claiming home office deductions, making them prove "exclusive use" for business purposes."

Opinion #4 - Says there is 'no evidence'

Theres two references from  Barbara Weltman who is a 'tax and business attorney since 1977' and author of multiple tax books :

in Three Myths About the Home Office Deduction
"There is no evidence that this deduction exposes a taxpayer to greater audit risk.
If you are entitled to a home office deduction because you meet all tax law requirements (e.g., you are a home-based freelancer who uses a space bedroom solely as an office), then take it."

and in How to Claim a Home Office Deduction and Sleep at Night
"It's generally assumed that if you work from home and claim a home office deduction, you're sending a red flag to the IRS and inviting an audit. While the IRS doesn't give statistics on audit triggers, it's important to know how to protect yourself if you claim a home office deduction"

Opinion #5 - Says its a 'red flag'

How Your Home Business Can Avoid a Tax Audit
by Karen E Klein who is a columnist / journalist 
says: "The home office deduction acts as something of a red flag to the Internal Revenue Service because it can easily be abused by small business owners who claim a larger home office than they actually have, or who deduct expenses for an office that is not truly dedicated to business use. "

Varying opinions 

There are five different opinions cited above from five different sources.    We've got two opinions #1 and #4 who say there is 'no evidence' of any audit risk.    Then we've got two opinions (#5 and #3) that say there is risk.   One opinion #3 goes as far as stating outright that the IRS "frequently" audits people who claim the home office.   Opinion #2 refers to the risk and just assumes it as if its somehow common knowledge.

I Trust the Experts

If we split up the opinions by experts in the field of taxes versus people who are journalists then we see that the two experts say there is 'no evidence' and the two journalists claim it is a risk.   However theres no evidence presented by the journalists nor do they cite a source or provide any data at all to back that claim.   Given that we've got conflicting claims here I'm inclined to trust the opinion of the tax experts.   The experts say there is no evidence of higher audit risks.

My Theory

This bit is just my own personal opinion and guesswork.    I'm thinking what happened is that some people took home office deductions and then got audited.   This lead to someone making statements claiming that the home office deduction causes IRS audits.   It may have either been isolated anecdotal reports that got picked up and repeated by the media.   It may have also been a more wide spread correlation between high audit rates and high home office deduction claims.   But as we know correlation does not imply causation.   Maybe there were a LOT of people who claimed home office deductions and who got audited... and maybe that was because they were improperly claiming the home office deduction.   One might assume that the real story is that "improperly claiming home office deductions leads to audits"  which isn't any kind of revelation.   If you improperly claim any kind of deduction then that will result in higher audit rates.   The IRS does obviously look for people who improperly claim deductions and will audit those more often.    I honestly do think that there are probably a lot of people who improperly claim the home office deduction.  Its actually not an easy deduction to take and the rules are strict.  

Bottom Line : There isn't a clear consensus on whether or not home office deductions lead to increased risk of IRS audits, however the tax experts say there is no evidence to support that idea.  


April 15, 2013

We're Getting a Nearly $6000 Tax Refund.

Its tax day if you haven't heard.

My wife and I actually got our taxes filed a couple weeks ago.   The result this year is that we're getting back a little short of $6,000 altogether.   Close to $5000 from the IRS and about $1000 from the state.

As I said we filed a couple weeks ago so it was the end of March.  Thats not as bad as some years, a couple years ago we filed on the eve of the 15th.   We have been kinda slow to do our taxes in recent years for a couple reasons.   First of all my Dad and I own a couple properties 50/50 which are located in the city he lives and he manages those properties.  That means that I have to wait for my Dad to get all his numbers figured and give us the information.   My Dad isn't really slow or fast about doing his taxes but he usually gets them done in March at least.  In any case we have to wait for him and then schedule our taxes after that.    Second reason we take a while is simply that it takes a while to organize all our information.   Lastly we have to give the information all to the CPA and then wait for him to actually fill out the forms for us and naturally he's got a pretty big backlog this time of year.   So anyway, thats why we are usually in April before we're done.  

Some of that $6000 refund is bad news actually.   A sizable chunk of our return is due to rental expenses.   And in fact this year we exceeded the passive income limit due to our total income and we couldn't claim all our rental losses against my ordinary income.   We had about $9000 extra in losses that we have to carryover to a future year.

Unfortunately in 2012 we had some pretty major expenses at our rentals.    Some of it wasn't anything out of the ordinary or anything that annoyed me.   We chose to cut down a couple trees on one property and that cost $1000.   I won't have to cut those trees down again and I won't have to pay for pruning and I won't have to worry about the tree roots ruining the foundation or getting into the pipes, so that was a good idea.     Some of the costs were basic routine repairs and maintenance like some plumbing fixes, replace a broken light switch, etc.   On the other hand we had some other costs that weren't routine.  We had to replace carpet after one tenant left and that carpet was only 2-3 years old.   Those same tenants also did a lot of misc. damage that was far above their deposit.   All of that came out of pocket and was not an expense that you ought to expect with a normal tenant.   We also had a broken pipe in that property that caused a lot of damage.

If we had a big fat profit from our rentals then we'd have to pay the IRS but due to our losses we are getting some cash back.   I'd much rather have profits than losses.

Most of the return is not due to the impact of rentals though.  Its a mix of various things.   I actually showed a bit of a loss on my company stock transactions even though they profited us.   We had charity deductions.  


March 31, 2013

Tax Benefits of Education Tax Credits Versus Using 529 Savings

If you're trying to save for your children's college expenses then you may be using a 529 savings plan.   The benefit of a 529 plan is that it gives you tax deferred savings and the gains are tax free if used for college.   In this sense it works like a Roth IRA in that you use post tax money and then you can withdraw the money to pay qualified college expenses without paying taxes.   Sounds good right?

However using a 529  for savings isn't necessarily the best option.  In fact if you use a 529 exclusively then you may be losing money by missing out on better tax savings via tax credits for college expenses.   The key here is that if you use money from a 529 savings plan then it doesn't qualify for other tax benefits like the tax credits.

First I should point out that peoples eligibility for tax credits will vary based on your income and the future of tax credits is unsure since they don't all seem to be permanent laws.  The American Opportunity Tax Credit is valid today but it is set to expire in 2017 I believe and may or may not be renewed.   If your income is too high then you won't qualify for credits at all.    For more details on the tax credits read publication 970

Lets look at an example.   For this example I'm going to assume you have a decent income and some pretty good assets so you generally won't qualify for much if any financial aid.   Your child then decides to go to the local public college so you "only" have to pay $10,000 in tuition and books.   Now lets compare using the 529 versus paying out of pocket.

529 savings :
If you'd saved $1000 a year for 18 years and gotten 8% annual growth then you'd have about $37,450 in the 529 plan.   You can pull that money out and use it for the tuition bill without any taxes. You pull $10,000 out of that plan to pay the tuition bill tax free.  

Out of pocket + tax credits:
Lets now assume that instead of using the 529 you just put the $1000 a year into a taxable account at Vanguard.  You bought a buy and hold index to minimize taxes.   Your money still grew 8% and you've still got $37,450.  However if you sell those investments you'll have to pay taxes on the gains.   The capital gains rate on that would be 15%. 52% of the money in the account is gains.  Lets say you wanted enough after taxes to pay for a year of college.  You could pull out $10,845 and pay $845 in capital gains taxes and be left with $10,000 after the tax bill.   You then use that money to pay for the college tuition.   Because of the current American Opportunity Tax credit you get a $2500 tax credit.

The end result on the two situations is :

529 savings : tax free, so tax bill = $0

Out of pocket + tax credits :  -$845 in capital gains + $2500 tax credit = $1,655 positive net

If you simply avoid a 529 in this situation it allows you to take advantage of the American Opportunity Tax credit which is up to $2500 in tax credit for eligible tax filers.    The 529 plan may be tax free by you're giving up a generous tax credit to save a little bit in capital gains.

Another example :   Lets say you're a single woman working as a teacher in Alabama.   You can get a good pay raise and maybe a promotion if you pursue a Doctorate so you sign up for part time classes on nights.   Your tuition is going to cost you $5000 a year.    You've got a couple years worth of tuition saved up in an account.

529 savings :  You put $5000 into a 529 plan last year in order to pay 2013 tuition.  The $5000 gives you a deduction on your Alabama state taxes so you save $5000 x 5% or $250 in state taxes. There is no federal tax impact.

Tax credits :   If you simply left the $5000 in a savings account and then paid out of pocket you'd qualify for the lifetime learning credit.   That credit pays 20% of your expenses.  In this case thats 20% of $5000 or $1000 in federal tax credit and theres no state tax impact.

For this example the 529 savings plan would save you $250 on your state taxes but using the federal Lifetime Learning Credit would save you $1000 on your federal tax bill.

Bottom Line:   Be careful that using a 529 savings plan for college will make you forfeit even more generous tax benefits available from education tax credits.


March 21, 2013

Who Pays the Alternative Minimum Tax (AMT)?

One of my pet peeves is the claim that the Alternative Minimum Tax is "punishing" the middle class.  Or this general assumption that its "only" the middle class that pays  the AMT.   To my own surprise I haven't discussed this topic previously as far as I can see.

I wrote What is Alternative Minimum Tax and How Does it Work a few years ago to discuss the basics of how AMT works.   I later wrote Percentage of Population paying AMT that gives the % of population per state that pays AMT.   I touched on the fact that only about 2-3% of the entire population pays AMT.  

Lets look at more details on who pays AMT and how much...

If you pull up the IRS tax stats on the topic you can find the amount of AMT paid per income.   The figures below are using the latest 2009 figures that I found at the IRS.

First lets look at what % of each income group actually paid AMT:

(click image for full size)
At the lower income groups you can barely make out some very small slivers of blue.  For the groups making under $50,000 less than 0.1% of filers pay AMT.    Hardly anyone making under $50,000 pays AMT and very few people making under $200,000 pays it.

Once you get to the $100,000 to $200,000 group it hits a noticeable 6.6% but that still a small minority.   Only when you exceed $200,000 income do you see large numbers of filers paying AMT.    Interestingly the % of filers paying AMT is lower for the people reporting > $1,000,000 of income as you can see its down in the 20% range for those highest AGI groups.   

I'm not sure why the 7 figure highest income groups pay AMT less frequently than the 6 figure folks.  It may be for a number of reasons.   For one the top marginal tax rate exceeds the AMT rate so they may simply face a higher tax rate using the standard progressive rates.   Or they may be paying more capital gains rather than income taxes.   Its also possible that the highest income earners are more likely to use techniques to avoid AMT (or other taxes for that matter).

Now lets look at what % of the actual tax dollars are paid by each income group :
(click image for full size)

You can not really see the slivers representing the people making under $25,000 or $25,000 to $50,000 but you can see the labels showing 0%.  Its not truly 0% but if I went out with 2 decimals you'd see its 0.04% and 0.02% respectively.    Clearly the vast majority of people paying AMT and the vast majority of the taxes come from the upper income groups.   90% of AMT tax revenues are paid by people making over $200,000 a year.

Bottom Line :   The vast majority of tax filers paying AMT and the vast majority of the tax revenues is from people making over $200,000.


March 1, 2013

How Rental Property Depreciation Works

One of the big tax benefits of owning rental real estate is the ability to claim depreciation of the property as a tax deduction.  This can result in a pretty substantial tax deduction.  

What is depreciation?    

First lets explain what depreciation means.   Depreciation is simply used to account for the loss of value in an asset over time.   Its easier to think of something like a car or a washing machine which will wear out over time and has a limited lifespan.   Its pretty clear that a car will generally lose value over time so a 10 year old car is worth a lot less than a 1 year old car.   For accounting purposes you can write this off as a cost to your business.  With equipment that has more than 1 year lifespan they use depreciation to write off the cost of the equipment over a longer period.   The depreciation period can vary depending on the kind of equipment.    Real property like a residential rental will also depreciate over time.  Buildings wear out over time just like anything else.   Now this seems upside down because generally the market value of real estate appreciates over time.  

What do you depreciate?

For depreciation of residential real estate you use the cost basis of the property excluding the value of the land.   You do not depreciate land value.   You can only depreciate the value of the buildings.   In addition to depreciating the building itself you can also depreciation certain types of equipment and capital improvements for a rental.  If you add an addition to a rental then you would depreciate the value of the addition as well.   Some things like appliances are also depreciated but they use a different depreciation schedule and I'll keep the discussion to the depreciation of the buildings for now.

How do you Determine the Value of the Land?

Figuring exactly how much the building is worth versus the land may not be straight forward.   When you buy a rental you buy the building and land together so you don't necessarily see a value for the land.   

Appraisals - This is probably the best way to get a value for land.  If you get an appraisal then you should have a value in the appraisal to show the value of the land. 
Property Taxes - A property tax statement may break down the value of the land versus the value of the building.    Property taxes work in a variety of ways and are often not a realistic reflection of actual market values.   However if your property taxes do break down land versus property then you can use that amount or ratio as the basis for figuring the value of the land when counting deprecation on your federal taxes.
Comps - Lastly you could look at the value of a vacant lot of similar size and estimate the value of land in the area.  For example if your rental house sits on 1/4 acre and an empty 1/4 acre lot in your area sells for $20,000 then you could use that comp to estimate the value of your land at $20,000.

How do You Calculate Depreciation?

Residential rental property is depreciated over a 27.5 year period.   That means that every year you depreciate 1 / 27.5 of the initial property value in a proportional straight line method.  So for example if you bought a house worth $100,000 and figured the land is worth $10,000 then the building is worth $90,000.   You then depreciate 1/27.5 (or 3.636% ) of that amount each year until 27.5 years are up and you've fully depreciated the property.  That would give you a deduction of 90,000 / 27.5 = $3,272.72 per year.    You would then depreciate $3272 per year every year that you own the property until you've done so for 27.5 years.

Theres is a catch..  You have to Pay it back when you sell.

Depreciation is a hefty deduction on your rental income but its not really a free ride.   When you sell a rental property you will generally have to pay back the depreciation in the form of depreciation recapture.    Recapture is a tax on the depreciation you claimed that you then get back in a sale.   Lets say you buy a house for $80,000 and then depreciate it about $14,500 over a few years.    You then sell the house for $100,000.   You'd have to pay capital gains on the $20,000 increase in value plus you'd have to pay depreciation recapture taxes on the $14,500 that you claimed in depreciation.

Summary points :
1. Depreciation of rental property is a tax deduction that offsets your rental income.
2. The amount you depreciate is the purchase price minus the value of the land. 
3. Calculating deprecation is = 3.636% x (property - land)
4. You depreciate the property in equal amounts annually for 27.5 years
5. If you sell the property you do have to repay depreciation recapture taxes.


December 20, 2012

What Percent of People file 1040, 1040A or 1040EZ?

When you think about filing income taxes you generally think about the 1040 form.   Thats the 'long form'.   There are also two shorter versions the 1040A and the very simplistic 1040EZ.     A large percent of the population doesn't do the 1040 form.   I got the numbers from the IRS 2010 tax stats.

With 142.8 million filers in 2010 the breakdown is as follows:

I was actually surprised that more people don't file 1040EZ.   For a lot of people taxes amount to a W2 for income and their standard deduction and exemption.


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