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The Standard Deduction and How to Beat it

Last time, we talked about the potential new tax rates. Much of my concern focussed on the standard deduction, which looks to rise quite a bit at the peril of personal exemptions. schedulea

But, as I hinted, there are opportunities to shift things around to our advantage. Let’s look at Schedule A (you can click the image to view it regular size). It starts with medical deductions. When working, our insurance premiums were deducted pre-tax, so this line never really mattered much. Now, the full tab is our cost and it’s above 10% of our income, but it occurred to me – why lose that 10% every year? Say the insurance cost is $10,000, but only $5,000 can be deducted. By paying the full 2017 premium before the end of this year, the entire insurance bill can be added to the Schedule A. This results in $2500 saved tax for paying the 2017 insurance an average of 6 months early. Think on this, it’s not paying a year early, since the payments aren’t due next December, they are due each month. The return on that $10,000 is actually close to 50%.

The same strategy can be applied to property taxes. Even if the bill for the second half of next year hasn’t been issued yet, the town is probably happy to take your money early. Depending on the size and cost of your house, this can be $4,000-$10,000 (or more), in a deduction pulled into this year.

The third, and last, deduction I’ll mention is charitable contributions. Schwab, Vanguard, and Fidelity all offer a way to make your donation and deduct it this year, but disburse it to charities at a future time. This is a great way to consistently support your favorite charities, while maximizing your tax saving.

If the new tax code passes, and you had $25,000 or so in itemized deductions, this strategy might help you group your deductions so that the $50,000 2 year total is split to $45,000 in odd years and $5,000 in even years. In other words, you take the $30,000 standard deduction one year, but pull in all you can to take $45,000 the next year. That’s nearly a $4,000 benefit by juggling the timing a bit.

Keep in mind, I wrote this with my thoughts toward the new tax code, but this strategy can help people now. A couple who looks at their tax return and realizes they have just $12,000 in itemized deduction, vs the standard deduction of $12,600, can use this method of pulling in deductions from 2017. I know that I’ll be writing a check next week for our entire 2017 medical insurance premium.

Let me know if this strategy is something that can save you some money on your taxes. More year end tax thoughts coming.

The new tax code?

Our new president hasn’t been sworn in yet, but he does have a tax overhaul proposal that has a decent chance of passing. Every change has winners and losers. Even changes that seem positive when first announced. One key provision of the new plan is to bump the standard deduction, from $6,350 single / $12,700 joint to $15K/$30K. Sounds great, right? But as they say, there’s no free lunch, and the personal exemptions are taken away. $4050/yr per person in 2017. Sounds simple, but it impacts taxpayers very differently, based on their circumstances.

  • A couple who doesn’t itemize – Their exemption + deduction (E&D) rises from $20,800 to $30,000. $9,200 less taxable income.
  • A couple that has $35000 in itemized deductions – They still itemize, but lose their exemptions. $8,100 higher taxable income.
  • A 3-child couple who doesn’t itemize – Their E&D drops from $32,950 to $30,000. $2,950 higher taxable income.
  • A 3-child couple that has $35000 in itemized deductions. They still itemize, but lose their exemptions. $20,250 higher taxable income.
  • Single Parent with 3 kids, taking Std deduction – Their E&D drops from $25,500 to $15,000. $10,500 higher taxable income. Ouch.

The plan also collapses the marginal rate structure a bit. trumptaxplan A couple with a taxable $75,000 in 2017 would have a tax bill of $9000 vs the current (2017) $10,317. For the first couple above, the non-itemizer, it’s just gravy, a bit of extra savings. For the itemizers with kids, it only offsets a tiny bit of the high total tax due.

For my family, our deductions are above the new standard deduction amount, so we will see a loss of the $12,150 in exemptions if the new code takes effect. On the flip side, there’s an interesting strategy that might help those who are in a similar position, with itemized deductions that are over this new (proposed) limit. A topic for the next article.

A Time to Heal

turnturnEight years ago, when Barack Obama was elected president, I heard a clip on the radio. a caller to the Rush Limbaugh show asking for his reaction. “I hope he fails,” were his words. Those words stung me, and stuck with me. Is it possible for a president to succeed and yet, the country be worse off? More important, can a president fail, and the country still be better off? In the end, I was left agreeing with senator Al Franken and forced myself to dismiss this as the rant of one person.

Now, the 2016 election is behind us. My history of comments and Tweets would show that my preferred candidate didn’t win. But as I reflect back to that 8 year old quote, I want to move on, and I want to hope for healing. I want to hope that somehow we are better off in 4 years. That there are more jobs, better jobs, for those that want them. That people of every demographic are able to say that no matter how they felt about who won the election, progress was made, the US is a safer place, that people are respected, and that we worry about the future just a bit less that we did before.

I know that readers expect posts about finance, the economy, taxes, etc. Trying to avoid politics is harder than it should be. Our finances are inextricably linked to what those in our government are doing. I hope, for all our sake, they act wisely.

2017 Tax Rates Announced

Wow, it’s that time again. The 2017 tax rates have just been announced by the IRS.

The tables aren’t the actual tax you pay on gross income, but on taxable income which is gross less a number of items, including the personal exemption which remains at $4,050 in ’17 and the standard deduction which rises to single $6,350 or joint $12,700, with an additional $1,250 for aged or blind.

Also, note that the IRA and 401(k) deposit limits haven’t changed for 2017.

I’ll be referring back to this article over the next year whenever the tax table is part of the conversation. Check out the new rate table and start planning for 2017.


A Failure to Communicate

A brief anecdote that I’ve been meaning to share.

I was at the airport getting my ticket at the counter, and I heard the agent at the next line asking a traveler when his passport expires. He had no idea what she was asking, and said so. “No understand.” The agent repeated the question, once, twice, and then shouting, “What is the expiration date of your passport?!” The man had obvious signs of being in the high tech field, logos I recognized, which had me thinking he was an engineer. But he was Asian, and obviously wasn’t understanding this word no matter how loud the agent shouted.

I felt compelled to do something, so I walked over, looked at him and said,”Sorry. When passport no good?” He repeated my words, looked at the passport and immediately found the date the agent couldn’t see. The passport was put down in front of the agent, the man’s finger pointing, and with a grin, he said,”expiration date.” He then turned back to me and held his arms out, I leaned in and hugged this stranger I just helped. I won’t forget this, or the look on the agent’s face. She seemed unhappy this issue was resolved. I think about that situation now and then, and I’m reminded how sometimes a bit of patience and understanding is all it takes.

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