Your Tax Question - 052

Dear John, I just got home from India where I have worked for the last year. What will happen on my taxes? Thank you so much, Cal.

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Hi Cal,

In order to not tax a taxpayer twice Congress allows you to take a Credit or a Deduction. The credit is usually the best route because it reduces your U.S. tax liability dollar for dollar where the deduction just reduces the amount of income that is taxable. Determine which is best for you according to the facts of your own individual case. See page 21 of the 1040 instructions for more information.

You know, I can help you with this - I'm just saying...

Happy New Year!!!

John

PS. Did you see that I am offering single moms a deal this year? I will do their taxes for $69.99 complete. That's all the forms necessary and eFile for just $69.99. It's just my small way of helping our single moms.

Your Tax Question - 051

Dear John, What can be expected for the future of taxation? I mean, will the president follow through on his promise to soak the rich people who earn $250,000 a year? Just wondering, Mike

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Hi Mike,

Good question, in 2011 the Marginal Tax Rate (the tax paid on the last dollar of income) will be increased across the board. Without further legislation the lowest tax rates are set to expire in 2010 and then 2011 will see in increase of taxes on just about everyone.

In 2011 the 10% bracket for the lowest wage earners will revert to a higher 15%. What that means is that a single person with an AGI under $8,350 will owe $1,252.50 instead of $835.00 - an increase of 50%. For an individual earning from $8351.00 to $34,000 there is really no change of tax owed at 15%, but for the few taxpayers who have an AGI of $34,001 to $34,500. they will see a 40% reduction in their marginal tax rate: 25% to 15%.

The next rate will be a 12% increase on individuals who have an AGI of $34,500 to $83,600, then an increase of 10.7% on AGIs between $83,601 to $174,400, from there an increase of 9.1% on AGIs between $174,401 to $379,150, and finally for those AGIs over $379,150 and increase of 13.1%.

While I will admit that a 9.1% increase on $174,000 winds up being a heap more significant than a 50% increase on $34,500 it seems to me that taxpayers with the lesser AGIs have less wiggle room in their monthly budgets and they are the ones who really wind up getting "soaked". It's sort of like the Widow's Mite - giving out of one's poverty is more impressive than giving out of one's wealth.

I'm sorry Mike if I showed my political hand in this answer. But when all is said and done those are the numbers that are scheduled for 2011 unless Congress acts.

Best,

John

Your Tax Question - 050

Dear John, is it true that I can deduct the sales tax that I paid through the year instead of the State taxes I paid on my income? Jim

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Hi Jim,

Yes, it is true. Instead of deducting the amount of taxes that you paid to the State on your Schedule A, you may make the deduction with the sales taxes that you paid through the year. This is done by a table that the IRS provides or the actual amount that you paid assuming that you have kept all the receipts as evidence. This approach to the deduction makes sense if you have made major expenses this year such as a car, RV, and/or addition to your home. Compare the allowed amounts and use what gives you the best deduction.

If you need help with this I am always looking for new clients - Email me.

Best,

John

Your Tax Question - 049

Dear John, I have heard that 2010 taxes are due on April 18th. Is this true? Thanks, Helen

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Yes Helen, it is true. Because of a holiday in Washington DC this year, the deadline for getting your taxes postmarked is April 18th. However, I suggest that you don't procrastinate with getting your taxes done because should something happen the IRS will nail you with a penalty and interest.

Get a hold of me and I will help you get your taxes finished and delivered on time.

Thanks,

John

Your Tax Question - 048

Dear John, Earlier this year my house was robbed and many thousands of dollars of valuables were taken and never recovered. My insurance company paid a very small portion but nowhere near what the value was for the items taken. What are the tax rules about losses? Thank you, Ken

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Hi Ken,

I am sorry that your house was robbed and that you have had to go through that ordeal.

Generally congress does not allow losses on anything but business assets but they do allow individuals to claim losses in the case of robbery. The loss is not allowed in the year of the incident if there is a chance at future recovery either of the property or an insurance claim. After that, there is a formula for figuring your loss, it reduces your actual loss but if it was large enough (and your income low enough) then it may be worth figuring.

Let me explain this with an example. Let's say that it has been determined that there is no chance at recovery of your property and your insurance company has already cut you a check. It has been determined, by your insurance adjuster, that your stolen property had an actual value of $10,000 even though you paid $30,000 for it. The rules state that you are allowed the lesser of the basis (amount you paid) OR the adjusted value (what the insurance guy says it's worth) as your loss.

But wait, the $10k still has to be reduced. The $10k has to be reduced by the amount of your insurance adjustment (let's say $2,000) so now you have an $8,000 loss. Plus, you have to reduce the loss by $100 per incident (for 2010) which takes the loss to $7,900. After these adjustments you will then have to reduce it by 10% of your $50,000 AGI - $5,000. You now have a $4,900 loss that you are allowed to deduct on your Schedule A.

That is the way the theft loss works, the actual facts of your particular case need to applied to these rules. Should you need a tax guy to work it out for you just give me a call I am always happy for another client.

Best wishes,

John