Bush tax cuts expiring will affect you!

This (shouldn't be) just in - Bush's tax cuts put more money in your pocket! Based on the normal readers of my blog, this is a fairly safe statement to make. These tax cuts expiring will mean you will be paying more money to the federal government. I have said this to many people and people continually had accused me of being far right or fear mongering - but you can read a good in depth article here at Yahoo! Finance courtesy of the Wall Street Journal's SmartMoney. Here are some of the top ways you will be paying more, quotes from the aforementioned article when possible:

1) Higher tax brackets for all. "The current six rate brackets of 10%, 15%, 25%, 28%, 33% and 35% will be replaced by five new brackets with the higher rates of 15%, 28%, 31%, 36% and 39.6%." Your first dollars will be taxed at a higher bracket. You can see the tax brackets here at MoneyChimp. The 10% tax brackets currently covers the first $8375 for singles and $16750 for married filing jointly. Thats immediately another $400 for single and $800 for married couples just for the first tax bracket.

2) Higher capital gains and dividend taxes. "Right now, the maximum federal rate on long-term capital gains and dividends is only 15%. Starting next year, the maximum rate on long-term gains will increase to 20%. The maximum rate on dividends will skyrocket to 39.6%." "Right now, an unbeatable 0% rate applies to long-term gains and dividends collected by folks in lowest two rate brackets of 10% and 15%. Starting next year, those folks will pay 10% on long-term gains and 15% and 28% on dividends (compared with 0% now) unless a change is made. "

3) The end of many more specific fixes to the tax code. The marriage penalty comes back. Itemized deductions and personal exemptions. begin to be phased out again for higher income individuals. You can check out the article for more specifics.

I hope this helps you understand better that we all used to benefit from these tax breaks and losing them will hit all of our wallets. I hope that it doesn't affect YOUR budget too much!

Good article on the new tax provisions in the housing bill

I finally found a good article about the new tax provisions in the big housing bill that was signed last week. Although each of the provisions targets a very select audience, I thought I would try to summarize:

1) If you are a first time home buyer (did not own a primary residence for 3 years prior to this purchase) between April 9, 2008 and July 1, 2009, you can get an interest free loan of 10% on the house up to $7,500. It comes in your next years taxes as a tax credit and must be repaid starting in the second year for 15 years. You can't make more than $95,000 for singles and $170,000 for couples and the credit is reduced for those above $75,000 and $150,000.

2) If you own a home but don't itemize your deductions and therefore take the standard deduction, you can property taxes on your home above the itemized deduction of up to $1000 for couples and $500 for individuals.

Those are the "helping" provisions. To pay for this, there is a third provision which is a tax hike. Here is a quote from the article describing that tax hike:

To pay for the new breaks, Congress adopted some revenue raisers, otherwise known as tax hikes, including one that affects homeowners. At present, taxpayers who own a vacation or rental property can begin using it as their principal residence and then sell it after two years, taking advantage of the break that excludes from income capital gains from the sale of a principal residence. The excluded amount is up to $500,000 for a couple or $250,000 for a single.

But thanks to the new law, after January 1, any time a house isn't used as a principal residence it reduces the gains eligible for exclusion on a pro rata basis. So, if a couple uses a house as a vacation or rental home for five years and then as a principal residence for five years, only half their gain will qualify for the exclusion.

If the couple has a $100,000 gain, they can only exclude $50,000 of that gain from their income. But if the same couple owns a mansion and sells at a $1 million gain, they can still claim the maximum $500,000 exclusion, because it's just half of their gain.

An odd result from a law that was supposed to help struggling, ordinary homeowners.

Well, it looks like that hurts people also that maybe haven't been able to sell their home because of the bad market. For example, if they moved from a house they lived in for 4 years and established another primary residence, and didn't sell their home for 1 year after that, they would only be able to exclude 80% of their gains regardless of the fact the last year of house taxes have been dismal. That's how I read it, but I am no tax professional. I think this is going to hurt a lot of people who already were hurt by the housing market.

Toll roads and ideas

Every day on my way to work I pass a sign that simply says, "No Tolls on 540" and has the website of the No Tolls on 540 organization. As a person who doesn't travel on the areas they are suggesting making a toll road with any frequency, I don't feel it necessary to choose a side immediately. However, as I consider "what if they make my section of 540 a toll road" and it changes my opinion. Overall, I am a fan of use taxes in that individuals can decide not to use the item if they do not want to pay the taxes instead of every penny coming out of taxpayers pockets. However, when the roads were built through my tax dollars I am a bit split. I understand the maintenance and creation of more roads costs more money and don't want that to also come out of my wallet and agree its reasonable to expect those who drive on that road consistently to be the ones to fork out the money for it. However, I don't want to simultaneously be paying taxes for someone else to be driving toll free from a different direction. I think my primary problem becomes how do you select where to start and how is this fair?

In general, I have only one problem with toll roads. Having grown up frequently using one of the oldest toll roads, the Pennsylvania Turnpike, I guess I was always alright with paying tolls. My single problem with them are that they don't follow logical supply and demand constructs. The toll roads should adjust their prices accordingly for how busy the roads are. Of course, doing this dynamically all the time would be difficult so its best to do statically such as have a weekday 6 AM-8 PM toll of $1.00, federal holiday toll of $0.50, and weekend/off-hour rates of $.0.25. Why shouldn't I be able to use the toll road for cheaper when there is no traffic on it? That would work best for my situation now too. Its easier to say okay to a toll that I use to go to and from work as its a necessary expense but it is more difficult to accept that same toll over nights and weekends when there is no traffic on the roads.

If I must pay tolls locally, I want this sort of adjustable rate that has me paying more for normal work trips and less for nights/weekend trips which are generally more for social reasons. Are there any toll roads like that?

Sell Sell Sell...then Buy back if you want to

If you make an Adjusted Gross Income less than $65,100 for couples and $32,550 for singles...read on. Otherwise, this probably won't be too exciting for you. The last Bush Tax Cut to go into effect allows for those with the income levels stated above to skip capital gains taxes on the sale of Stocks, Funds, and other assets like Vacation homes so long as you have owed it for less than one year. You would pay 0% tax on the amount up to that limit...so let's say you made $55,100 as a couple...your first $10,000 would be tax free in the sale.

Don't want to sell that investment, here is a quote from the above references Forbes article:

What if you qualify for the 0% gains rate but don't want to sell your stock now? Maybe you don't need the cash. Or maybe you think that the stock will go higher? Not to worry, you can sell shares at a profit and buy back the same stock immediately, replacing your old holdings with new stock with a higher basis. (No, the "wash sale" rules, which make you wait 31 days to replace stocks, don't apply if you're selling for a gain.) "It's a great hedge against higher capital gains tax rates in the future, says Marc Soss, a tax lawyer in Tampa, Fla.

Stimulus spelled out

Wondering how this complicated rebate scheme attached to the economic stimulus plan works? This Forbes article does a good job of explaining. They break it out into 3 main rebates so long as your 2007 and 2008 adjusted gross income (AGI) is less than $75,000 for individuals and $150,000 for couples:

1) Any adult with an AGI of $8,750 for single or $17,500 for a couple will get a $300 per adult rebate.
2) Each child earns the adult $300 so long as the child is 17 yrs of age or younger the whole year (2007 is the assumed year)
3) An extra $300 per adult so long as that adult owed at least $600 in taxes. Couples would have to owe $1200 together. The example given is that if the couple only owes $900, they will only get an extra $150 per adult for a grand total of $900 back.

Here is the real crazy piece of information:

The rebate is technically a credit against your 2008 tax bill that is being paid (in most cases) as what we'll call a "prebate." This prebate is based on your 2007 income tax return. The actual credit is based on your 2008 tax return. Whichever year produces the bigger check for your family is the year that counts.

So, I guess if you can't earn the rebate on your 2007 taxes you might be able to still earn it for 2008. This is so confusing, no wonder it took Congress so long to pass it. Here is the closing line which is all too true:

Got all that? A true stimulus bill--for accountants, that is.

I guess those who have accountants or use tax software will be getting their money's worth.

Stimulate my economy

I think its interesting where Congress drew the line in the sand between the too rich and those that need to help the economy survive. As far as I understand it, the desire is to get money in the hands of the people so that they spend it and by spending it, push more money into the economy. I think the unfortunate thing is the line in the sand. Those making more than $75,000 as a single person or $150,000 for married couples do not see a dime (depending on how the money is phased out). This says either of two things:
1. Those making above that amount do not need extra money to pump into the economy.
2. Those making above that amount would not use the money to stimulate the economy anyway.

If Congress made the first assumption, it seems that the amount was a bit low to declare that those people do not need the extra money. Those people are the ones that pump money into the expensive coffee drinks, upgrades to their homes, and other services which have a great trickle down effect. They also typically have money tied up in investments, which right now have been doing poorly and are less likely to spend their money when investments are not doing well. So, I guess I would say that giving them some extra money to pump into the system would have been a good idea.

If Congress made the second assumption, I am not sure I can argue that as well. Those people with money tend to be some of the less likely people to frivolously spend it since they have many of the nice amenities in life already. That said, they also know how to spend the money and often it can be on services rather than goods which generally keep more money in the US economy. For example, buying that expensive TV may siphon the money out of the US economy quickly as its not made in the US and the company who makes it is not often a US based company...so profits leave the US quickly. However, if you have a service like a landscaping service, everything from the plants to the laborers should be US tax paying individuals.

Either way, I guess I just wonder how the majority of people will spend this money which will only go to the lower class and most of the middle class. (All of the middle class by some definitions). Its about 1 month after the Christmas spending cycle and there is problems in the housing market. How many people will use this to help with their mortgages or pay off credit card debts racked up from Christmas? I personally hope that many will. But, that doesn't stimulate the economy.

Don't get me wrong by this posting, I don't believe the upper class at this point needs the money. I just think that the theory for how this money is going to get pumped into the economy isn't one that scales. How about tell the upper class that if they pull money out of their investments and spend it all on services, they can not pay tax on those investments. That seems like a way to get the rich to put some more money into the economy :-)

Write down those check numbers

As I wrote about a few weeks ago, there have been some significant changes for the rules about what documentation you must have for 2007 tax deductions to charities. Because of these rules, we have over $100 in tax deductions we will miss because we don't know the check number and we did not receive a receipt in the mail for the charity or because we know the check number but the small amount of the check does not warrant the $1 charge our bank charges per official copy of the check. Each of the amounts we did not get back were checks given to a friend raising money for a trip or for a charity. One friend's children whose father died of cancer in 2006 decided to raise money for St. Jude's. We sent them a check which was made out to St. Jude's...but did not receive a receipt and can't find the check number :-( Another friend was going on a mission trip to a foreign country through a local church. We made the check out to Providence, one of the largest churches in the area, but haven't seen a receipt from them either. There are a couple of other examples, but clearly this is our fault for not tracking check numbers early in the year. All total, we needed about 7 canceled checks but ended up only getting two of them.

While this sounds like a complaint, I did intend this to be informational for people to learn from our mistake. If your bank is like our credit union and does not make canceled checks viewable online (Bank of America makes the checks viewable online for free) or sends you canceled checks, make sure you record the check number of every contribution you make next year. If its a $250 or larger contribution, you have to have a receipt from the charity anyway. But if its smaller, write down the check number now and plan on getting that canceled check.

TurboTax discount

I have been a user of TurboTax online for about 7 years now and I would highly recommend it. Here is a 25% discount for anyone to use, whether you have a Fidelity Account or not. If you work for IBM and are reading this, you will find we get a slightly better discount (30% off) though.

Taxes, Withholdings and Deductions

First, I should remind everyone that now is the best time to redo your withholdings on your W4. The best place to do this is the IRS Withholding Calculator. By recalculating your withholdings annually, you will help ensure that you are not giving the government an interest free loan AND that you will not owe money at the end of the year. If you are getting married or having a child this year, it counts for the entire year...so calculate it as such.

That said, there are some new rules in the IRS this year which have caused us a bit of a headache. Defined in IRS publication 526 for 2007, there are new rules about deductions and in particular what documentation must be needed. For cash contributions of any amount, you must have one of the following regardless of the amount you contribute:

   1. A bank record that shows the name of the qualified
    organization, the date of the contribution, and the
    amount of the contribution. Bank records may include:
         1. A canceled check,
         2. A bank or credit union statement, or
         3. A credit card statement.
   2. A receipt (or a letter or other written 
    communication) from the qualified organization 
    showing the name of the organization, the date of the
    contribution, and the amount of the contribution.
   3. The payroll deduction records described next.

Since our bank doesn't make available to us our cancelled checks, we are stuck in limbo hoping the charities give us a receipt or we will have to figure out the check numbers and request them of the bank.

But the new rules don't stop there, they take special exception to any single contribution over $250. If you have five $50 contributions, that wouldn't count. But, a single $250 contribution has special rules. The rules are that the charity that you gave this $250 or more donation to must acknowledge that contribution and the acknowledgment must meet these tests:

   1. It must be written.
   2. It must include:
         1. The amount of cash you contributed,
         2. Whether the qualified organization gave you 
          any goods or services as a result of your 
          contribution (other than certain token items 
          and membership benefits),
         3. A description and good faith estimate of the
          value of any goods or services described in (b) 
          (other than intangible religious benefits), and
         4. A statement that the only benefit you received 
          was an intangible religious benefit, if that was 
          the case. The acknowledgment does not need to 
          describe or estimate the value of an intangible 
          religious benefit. An intangible religious benefit 
          is a benefit that generally is not sold in 
          commercial transactions outside a donative (gift)
          context. An example is admission to a religious 
          ceremony.
   3. You must get it on or before the earlier of:
         1. The date you file your return for the year you
          make the contribution, or
         2. The due date, including extensions, for filing
          the return.

Overall, this makes it tougher on those of us who are contribute to various charities. In a given year, thanks to many queries for support, Heather and I may give to 15-20 charities. Now, we have to try to track down receipts, canceled checks, and acknowledgments for all of these contributions. Some contributions may be as low as $5-10. So, at some points I guess the government wins because people may not go through the hassle for deducting those small contributions.