The IRS Deductions Blog

Archive for May, 2011

Question: Planning for 2008 Taxes- Cash Donations to Not For Profits & Other Deductions?

I got nailed on my ’07 taxes, was expecting a big return and ended up owing…

Part 1: In the past I have supported a number of not-for-profits. I’m looking for guidance or resources which will allow me to calculate the maximum cash amount I should donate to charity while still realizing maximum tax savings. Is there a handy calculator somewhere on the web for this? Somehow I assume its more complex than that…

Part 2: I’m already putting 8% in a 401k and contributing to an FSA. I bought a house a few years ago but I really can’t afford to live a comfortable lifestyle and support all of the bills too, and good luck selling a house at a decent price in this market! The good thing is that I do deduct mortgage interest and make a tiny piece of profit.

Any other suggestions to LEGALLY reduce my tax burden?

Sheesh.. I’m not even rich for god’s sake.

Answer: 1. NEVER spend money for the tax savings. You will ALWAYS lose as long as tax rates are less than 100%. At best, your tax savings will be equal to the amount of your charitable donations multiplied by your marginal tax rate. If you’re in a 15% bracket and donate $1,000 you only save $150 in taxes. You still have $850 less in your pocket than you would have had had you not made the donation. Therefore it ONLY makes sense to donate for the good that it does, never for any tax savings.

2. Keep up with the 401(k) deductions, at least at the level needed to get the maximum employer match if your employer offers one. That’s FREE money to you once it’s fully vested.

Only you can decide if the tax benefits of home ownership are worth it. The deductibility of mortgage interest and property taxes are modest at best, and a LOT less than most folks figure. You get no benefit at all from the portion of your Itemized Deductions that are less than your Standard Deduction. Since the Standard Deduction rises every year and interest generally shrinks, the value of the deduction will shrink over time. If your total itemized deductions are $1,000 greater than your Standard Deduction Amount, your TRUE tax savings is only $150 in a 15% tax bracket or $250 in a 25% bracket.

The payoff on buying a home comes when you sell, IF you sell at a profit. You get to exclude the gain of up to $250k if single or $500k if married filing jointly from tax. Many folks are learning that that is a hollow benefit with property values tanking in most of the country.

If you can bail at zero loss and rent a similar property for less than your total current costs, less the TRUE tax benefit, then renting makes more short to mid term right now.

Don’t become a slave to tax savings alone! Consider your total WEALTH after taxes and all expenses. Renting modest digs and investing the difference in the stock market for the long haul will generally generate MUCH more total after tax WEALTH than being a slave to a house and mortgage and maintenance and repair costs.

Historically the stock market has paid off FAR better than any gain from a personal residence ever has. Historically the gain on a home barely covers inflation in the long term, short term market fluctuations excluded. Folks who bought at inflated prices just before the market collapsed are learning that lesson the hard way right now. In some parts of the country it may take them 10 to 20 years to recover their investment and start turning a profit. But the guy who chose to rent and invest the difference in a carefully chosen stock portfolio could be a millionaire in 20 years.

Consider the tax impact of any financial decisions that you do make; not doing so can be costly. Just don’t let taxes drive the bus! That can be even MORE costly in the end!

Items on Amazon Right Now for Tax Deduction Mortgage Calculator:

IRS offers tax tips for newlyweds

It may not be high on the list of wedding plan activities, but there are a few, simple steps that can help keep tax issues from interrupting newlywedded bliss, according to the Internal Revenue Service.

EverGreen13TVshowPART_1(10/30Min): GreenHouse BuildingScienc

Items on Amazon Right Now for Tax Deductible Business Expenses:

Phillips-Van Heusen Corporation Reports 2011 First Quarter Results

Phillips-Van Heusen Corporation [NYSE: PVH ] reported 2011 first quarter results.

Deducting Business Expenses Explained By New York Accounting & CPA Tax Firm

Question: Child care credit or Flex Spending Account??

What is better… to take the deduction of $600 on taxes or use a pre tax Flex Spending account through work. Our child care costs were $4,300 last year & I am able to deposit pre-tax funds into a spending account through work & just want to see what anyone else does???

Answer: Pretax should usually be a better deal. It would appear that you are in the 25% tax bracket…and 25% is better than 20%.

You’d have a lower AGI for anything else that is hit with a phaseout.

Officially try your taxes both ways by dummying up a 2007 1040 with the same numbers for income.

Items on Amazon Right Now for Flex Spending Tax Deduction:

Dependent Care Flexible Spending Account

Items on Amazon Right Now for Qantas Club Deductible:

Question: Are these Tax Deductions legit?

contact lenses, improvements to my owned home, drycleaning for business clothes, gambling losses in AC (although i dont have any proof for these other than my debit card statement)

Answer: Contact lens are a Deductible Medical expense if they were prescribed by a qualified optomolgist. Not deductible if they were those colored lens some folks wear for cosmetic/style reasons. You must itemize your deductions on schedule A to see any benefit and you total medical deductions must also exceed 7.5% of your AGI (adjusted gross income). Most of us, apart from the elderly, cannot itemize medical expenses for this reason.

Home improvements (as opposed to repairs) which have a useful life over 1 year are added to the basis of your property (i.e., reduce the gain you’ll ultimately see upon its sale) but don’t result in a deduction in the year they’re incurred. So keep good records of your improvements until the property is sold.

Dry-cleaning and laundry service is deductible one of two ways. (1) You can deduct dry-cleaning/laundry expenses incurred on business travel while away from home. (2) You can deduct dry-cleaning/laundry expenses if ytour employer requires you to wear work-specific uniforms or clothing that is not suitable for everyday wear (e.g., hospital scrubs, protective clothing, delivery workers, mail carriers, police and fire-fighters). Again, these expenses must be itemized on schedule A as a miscelaneous deduction.

Gambling losses are also deductible but only to the amount of your reported winnings, and only with proof. Debit card stmt may suffice provided it shows the date, place, amount and nature of the payment(s). In the future, it would be wise to keep a contemporaneous log of your expenses.

Good luck!

Items on Amazon Right Now for Tax Deductions For Home Improvements:

BMO Financial Group Reports Good Second Quarter Results, Earning $800 Million of Net Income

TORONTO, ONTARIO–(Marketwire – 05/25/11) – BMO Financial Group (TSX: BMO – News )(NYSE: BMO – News ) and BMO Bank of Montreal – Second Quarter 2011 Report to Shareholders —————————————————————————- BMO Financial Group Reports Good Second Quarter Results, Earning $800 Million of Net Income Financial Results Highlights: Reported results for the …

William Raabe Tax Tips Part 2