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On Federal Income Taxes - Weeks 2 - 3
Oct. 8th, 2013 10:13 pmI learned a few more interesting things.
State Sales Tax
By far the most shocking thing I learned about taxes concerns the sales tax deduction. For the past few years, those who itemize have been able to choose whether to deduct their state income tax or their state sales tax. For people in states like mine that have no state income tax, it's a no-brainer.
The value you look up in the tax tables for sales tax you paid--in case you can't or don't want to use your actual receipts--is so low that virtually everyone spends more than that amount. This shocked me because I actually did have about 10 or 11 months of receipts one year and decided to try adding them up and the total was nowhere near the figure in the table (even pro-rated for the whole year). Most things I spent money on just didn't have sales tax - property taxes, utilities, groceries, plane tickets (I think), ballroom dance lessons from a nonprofit organization, stuff from Amazon.
My instructor tells his clients (and you do tend to get repeat clients) to collect all their receipts in a bag and take ten minutes at the end of every month to add up the sales tax. Most people spend substantially more. In fact, in all his years, he's had only one client whose total was lower than the value in the table. And that guy basically hoarded every penny he earned.
So I'm clearly some kind of complete weirdo. (I mean in yet another way that I never realized before.) Ah, well, as usual I don't mind being a weirdo in this way. But in case you're not, you might want to look into your receipts for a month or so to see if it's worth keeping track.
And maybe I should do that next year myself in case my income is as scrawny as I think it's going to be (thus making the number I find in the table scrawny as well).
Kids
Wow, it's possible to get a lot of tax breaks for having kids (and actually raising them yourself). I knew about the extra Personal Exemption. For 2012 that was $3800 per person, which is a reduction in your taxable income. Your taxes are only reduced by the percentage of your marginal tax rate. So for me, that would come to $570 per kid. If you don't make enough money to have enough taxes to subtract that amount, then it does you no good.
Then you get a Child Tax Credit of $1,000 per kid. This is a reduction of your actual taxes due. You don't get the whole amount if you're too rich. And you don't get the whole amount if you're too poor to have enough taxes to subtract this from, but in this case you might be able to take the excess as an Additional Child Tax Credit which you can get paid to you after filing your taxes. For me this would be $1000 per kid.
Finally there's the Earned Income Credit. For people with no kids, you have to be pretty poor to qualify. Even at my income, I'd have to have three kids to qualify, and it would be on the order of $600. The amount is a bell curve--the more earned income you have, the higher your credit, to a point--then additional increases in earned income reduce your credit. It maxes out at just under $6,000 for married people with three (or more) kids (on this one, you don't get any extra for having more than three kids. And you don't have to owe enough taxes to subtract this from--any negative amount you owe can be sent to you.
Obviously most parents spend way more than $1570 per year for each their kids, so it's not like they come out ahead of me financially due to these tax breaks, but it still surprised me how big the tax breaks really are. I didn't really expect the federal government to cover quite so many of these costs. And I didn't know that some pretty low-income families get some pretty out-of-this-world "refunds" (several thousand dollars).
Another interesting thing is that the tax law does understand that not all kids are being raised by their two biological parents in the same household. There are a lot of ways they try to make it fair without making it too crazy complicated. I love the way their definition of child includes biological children, adopted children, step-children, and foster children. And the children and grandchildren (all the way down) of all of those people. Plus you can get some or most of these benefits for other relatives and even, in some situations, unrelated people, who you are supporting. But they never split up these exemptions and credits--each one goes fully to one person or no one at all. (That's the part where they try to keep it simple.) But it could be a different person every year.
Health Savings Accounts
I did a lot of reading on HSAs when I first got one, but the class reminded me that you can use the money for health insurance payments if you're collecting unemployment (which I wasn't at first, but which I now am). And you can use it for COBRA health insurance, which I'm pretty sure includes my COBRA dental insurance. And I learned you can use it for transportation costs (or $0.24 per mile if you drive) to and from appointments and pharmacies.
I wasn't going to max out my contribution this year because who knows if I'll get any income to speak of in the next couple of years, but these discoveries show me that I wouldn't have as much locked up as I feared. And the tax savings on next year's contributions could be zero if I don't get a reasonable amount of work, so I may as well make those contributions this year. So I'm going to max out my contributions after all.
In other HSA news, my account quit paying way better interest than my online savings account and in fact now pays a little less, so it's no longer exciting to keep my money in there. However, I may not empty the account ASAP and close it because that company is on an affiliate list for my homeowner's insurance, which saves me $5/month on that premium.
State Sales Tax
By far the most shocking thing I learned about taxes concerns the sales tax deduction. For the past few years, those who itemize have been able to choose whether to deduct their state income tax or their state sales tax. For people in states like mine that have no state income tax, it's a no-brainer.
The value you look up in the tax tables for sales tax you paid--in case you can't or don't want to use your actual receipts--is so low that virtually everyone spends more than that amount. This shocked me because I actually did have about 10 or 11 months of receipts one year and decided to try adding them up and the total was nowhere near the figure in the table (even pro-rated for the whole year). Most things I spent money on just didn't have sales tax - property taxes, utilities, groceries, plane tickets (I think), ballroom dance lessons from a nonprofit organization, stuff from Amazon.
My instructor tells his clients (and you do tend to get repeat clients) to collect all their receipts in a bag and take ten minutes at the end of every month to add up the sales tax. Most people spend substantially more. In fact, in all his years, he's had only one client whose total was lower than the value in the table. And that guy basically hoarded every penny he earned.
So I'm clearly some kind of complete weirdo. (I mean in yet another way that I never realized before.) Ah, well, as usual I don't mind being a weirdo in this way. But in case you're not, you might want to look into your receipts for a month or so to see if it's worth keeping track.
And maybe I should do that next year myself in case my income is as scrawny as I think it's going to be (thus making the number I find in the table scrawny as well).
Kids
Wow, it's possible to get a lot of tax breaks for having kids (and actually raising them yourself). I knew about the extra Personal Exemption. For 2012 that was $3800 per person, which is a reduction in your taxable income. Your taxes are only reduced by the percentage of your marginal tax rate. So for me, that would come to $570 per kid. If you don't make enough money to have enough taxes to subtract that amount, then it does you no good.
Then you get a Child Tax Credit of $1,000 per kid. This is a reduction of your actual taxes due. You don't get the whole amount if you're too rich. And you don't get the whole amount if you're too poor to have enough taxes to subtract this from, but in this case you might be able to take the excess as an Additional Child Tax Credit which you can get paid to you after filing your taxes. For me this would be $1000 per kid.
Finally there's the Earned Income Credit. For people with no kids, you have to be pretty poor to qualify. Even at my income, I'd have to have three kids to qualify, and it would be on the order of $600. The amount is a bell curve--the more earned income you have, the higher your credit, to a point--then additional increases in earned income reduce your credit. It maxes out at just under $6,000 for married people with three (or more) kids (on this one, you don't get any extra for having more than three kids. And you don't have to owe enough taxes to subtract this from--any negative amount you owe can be sent to you.
Obviously most parents spend way more than $1570 per year for each their kids, so it's not like they come out ahead of me financially due to these tax breaks, but it still surprised me how big the tax breaks really are. I didn't really expect the federal government to cover quite so many of these costs. And I didn't know that some pretty low-income families get some pretty out-of-this-world "refunds" (several thousand dollars).
Another interesting thing is that the tax law does understand that not all kids are being raised by their two biological parents in the same household. There are a lot of ways they try to make it fair without making it too crazy complicated. I love the way their definition of child includes biological children, adopted children, step-children, and foster children. And the children and grandchildren (all the way down) of all of those people. Plus you can get some or most of these benefits for other relatives and even, in some situations, unrelated people, who you are supporting. But they never split up these exemptions and credits--each one goes fully to one person or no one at all. (That's the part where they try to keep it simple.) But it could be a different person every year.
Health Savings Accounts
I did a lot of reading on HSAs when I first got one, but the class reminded me that you can use the money for health insurance payments if you're collecting unemployment (which I wasn't at first, but which I now am). And you can use it for COBRA health insurance, which I'm pretty sure includes my COBRA dental insurance. And I learned you can use it for transportation costs (or $0.24 per mile if you drive) to and from appointments and pharmacies.
I wasn't going to max out my contribution this year because who knows if I'll get any income to speak of in the next couple of years, but these discoveries show me that I wouldn't have as much locked up as I feared. And the tax savings on next year's contributions could be zero if I don't get a reasonable amount of work, so I may as well make those contributions this year. So I'm going to max out my contributions after all.
In other HSA news, my account quit paying way better interest than my online savings account and in fact now pays a little less, so it's no longer exciting to keep my money in there. However, I may not empty the account ASAP and close it because that company is on an affiliate list for my homeowner's insurance, which saves me $5/month on that premium.