More Tasks Than Time
It's true for Congress. It's true for you. It's true for me.
Congress has a full plate. Third year of global recession. The war on terror goes on. Energy and pollution are bigger concerns than ever.
As I send this off to be printed, July is gone. Congress will meet briefly, then break for the elections. Another short session late this year, but any really important changes will wait for the new Congress convening in January.
You and I face the world of your income tax. Several familiar laws have expired. But, they might still be extended. More are set to expire at the end of this year. I'll discuss some important ones in this issue, but I must warn you - - - both of us must be prepared for last-minute changes in tax laws.
If Congress Does Nothing At All - - -
Several "temporary" laws were enacted over the past 10 years or so. 2010 is the last year for many of them. Congress does this to allow future legislatures to "fine-tune" new ideas after some experience with them. This seems wise. Problem - important new issues pop up. (Did I forget to mention natural disasters and big oil spills?) Congress has had a lot to deal with. However, in just a few months we face massive chances in tax laws. Suppose Congress can't find the time to deal with these.
Two Examples. Let's look at a couple of ordinary families. We'll look at their 2010 income tax bills under current laws. Then I'll show you their 2011 tax bill assuming our laws simply follow what is "on the books" at this time.
Retired Couple. Frank and Mary are both 67, and retired. Their income consists of interest and dividends, a pension, and social security for each of them. They use the standard deduction. Here are the numbers:
|($1,500 "qualified" dividend, plus $500 capital gain distribution)
|Now lets compare their income tax bills for 2010 and 2011:
Wow! How can the 2011 tax be so high? Easy. The 10% tax bracket is set to expire. Relief from "Marriage Penalty" expires, cutting the standard deduction. The capital gain: We use a split rate - 0% for incomes below the 25% tax bracket, 15% above this. No tax at all for our couple! In 2011 the rate goes to 10%. The qualified dividend is even worse. In 2010 the tax is figured as if this were a capital gain - no tax! In 2011 the dividends will be "ordinary" income. They'll be taxed at 15%.
Working Couple. John and Marsha both work, and have two children in grade school. Their income is from wages, and they also use the standard deduction.
|What do they pay?
|Less: Child Credit
|Less: Tax Credit for Workers:
|Total paid to government:
Ouch! Again, no 10% tax bracket and reduced standard deduction make a big change. For children under age 17, the child credit is set to drop from $1,000 to $500. The special "Making Work Pay" tax credit of $800 expires after 2010.
What Can We Expect? I wish I could tell you! The entire point of these examples is to let you know just how unsettled tax laws are for both 2010 and 2011.
One of my biggest fears lies in trying to help you plan for the impact of coming changes.
Some 2010 rules may still change before Tax Time. In fact, we might see a year like 2006, when IRS had already released forms before some last-minute changes in December. There were a couple of valuable deductions allowed by law, but IRS forms had no lines to claim them!
Worse - I may not know the 2011 rules until after I've prepared your 2010 return - and helped make plans for 2011. What do we do then?
Will we see new and unexpected rules? Some expiring tax breaks will be extended, but which ones? You could be left with a serious shortfall in your withholding or estimated tax payments. Tax planning is a risky proposition.
Owning vs. Renting - Time To Switch?
Most folks set a goal of owning their own home. A smaller number prefer the simplicity and freedom of renting. When you consider making a switch from one to the other, cost is a major factor. That's where 1 come in - income tax distorts the numbers.
Tax Deductions. It's very simple. Homeowners can deduct mortgage interest and property tax they pay. There's a limited ability to deduct mortgage insurance premiums, but this is supposed to expire after 2010. (Mortgage insurance, not homeowner insurance.) Normally, you may not deduct utility bills, maintenance, repairs, furniture, or improvements. Just interest and taxes.
Claiming Deductions. Anyone can use the "standard deduction". At present it's $5,700 for single filers, twice as much for a couple. Suppose you're a single renter, and typically have $4,000 worth of deductions from state taxes, charity, and some job expenses. If you buy a home, the first $1,700 of new deductions from interest and taxes on the property won't save you a penny. Only the excess helps.
Tax Brackets change the real cost of your deductions. The higher your income, the higher the tax on your uppermost dollars. New deductions remove some of these dollars. Spend $1,000 on a deductible item and your taxes go down. A wealthy taxpayer might see brackets of35% for federal tax, plus another 10% to the state. The $1,000 deduction reduces his tax by $450, leaving a net cost of $550. One with modest income might see only a $150 federal savings, and no state savings at all.
Example. Imagine a renter paying $1,500 monthly rent is shopping for a home. He might see a home needing a $220,000 mortgage, plus payments for taxes and hazard insurance. The total obligation is $2,000 monthly. His first impression is "Wow, I could never afford the extra $500 a month!"
Nearly Equal! After we take account of the tax savings, the real cost might be nearly identical to the current $1,500 in rent. The $2,000 monthly payment includes $900 or $1,000 in interest, plus another few hundred for taxes. Depending upon income and tax bracket, the "after- taxes" value of the $2,000 is likely between $1,400 and $1,700. The new $2,000 might have the same "feel" as the familiar $1,500 rent.
Switch to Rent - Reverse This! Today we see folks forced out of their homes for a variety of reasons. If you abandon a property with the same $2,000 monthly cost, you might find a rental at $1,500. Whoops! Your tax deductions are now gone.
Your income tax bill is going up! It might increase by $500 monthly. If so, it will still "feel" the same as before. You have the same sad problem.
Your Case - Call Me! Each taxpayer (and property) is unique. If you face a change, I can help. Whether you're buying a home, or moving out in favor of renting, the numbers are deceptive. You are used to one position. To evaluate the other involves taxes. I can help you get a "feel" for the real numbers. Please call me.
Energy Credits Are Alive And Well
Two Credits help homeowners - one for saving energy, one for making it.
Energy-conscious homeowners can "partner" with the government to help cover improvement costs. Easiest way to understand the programs is to distinguish between conserving energy, and actually generating it.
Conserving Energy - Main Home Only. For '09 and' I 0, you can get tax breaks for energy-saving changes in your home. Insulation, energy-saving windows and doors, and high efficiency heating and cooling devices. Main home only, not a vacation home or a rental.
Limits. You can get a 30% rebate on your tax return for the first $5,000 spent in 2009 and 20 J 0 combined. That's up to a $1,500 tax reduction. Once expenses pass $5,000 you're on your own - no more credits.
Which Items? Check with the manufacturer. There are complicated engineering standards. IRS says we can rely on manufacturer's statements, so keep a copy of their brochure. They advertise these savings loudly.
Which Costs? A little tricky here. For some items you may include only the cost of the item or materials, but not installation costs. For others, you can include installation costs. Roughly speaking, no installation costs are allowed for windows, doors, or insulation - the "handy" homeowner might install these himself. With items like furnaces or air conditioners you can include installation - these often require permits and inspections. Play safe, and keep records of all costs separately.
Generating Energy - Any Residence. Generating energy is good for America's future. That's why the tax incentives exist. The credits for generating energy are bigger, better, and more extensive.
Which properties? Any residence you occupy personally, but not a rental. You could do this with multiple properties.
What Kind of Measures? Solar panels to generate electricity or heat are the most common. Energy from wind, geothermal, or fuel cells also counts. Only items serving living areas qualify - nothing for pools or spas. Include all costs involved in the project. If you get subsidies or rebates from the power company or your state, your credit is based on your net cost.
How Much? The credit is a flat 30% of your cost, with no upper limits. These measures are costly. If you spend $40,000, you get a guaranteed $12,000 tax break. If your credit exceeds your tax, you can carry the excess to future years, until you get the full credit.
When? The conservation credits cover 2009 and 2010 only. The credits for generating energy are good through 2016. Any carryovers are good indefinitely.
Business Credits. The information here applies only to residential properties. There are credits for work done on business properties, but several rules are different. If you need help here, please call me.
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