Tax Tantrum Tuesday: Charitable Contribution Come Up

Remember my "You Have Arrived" post regarding the ability to itemize on your taxes? Well I met my goal this year...I stayed consistent with my tithing in church (which was a 2011 New Year's resolution for me) and it resulted in me being able to itemize on my 2011 federal tax return in addition to being blessed beyond measure. I thought it would be nice of me to share how this turned out to be a benefit for my taxes... even though a tax deduction for charitable contributions was not even 50% of my motivation for wanting to donate more to non-profit organizations including tithes to my church.

As you all know from my tax posts...either you can claim the standard deduction or itemized deduction on your federal tax return. The standard deduction for 2011 is $5,800 for singles no matter how much you made. Itemizing is a bit different and fluctuates based on what you are able to itemize. For 2011, I was able to itemize $7,160. This included my state income taxes paid (this would've been taken out of my paycheck regardless) as well as my charitable contributions (roughly $4000 in tithes and other charitable donations throughout 2011). So in essence, for 2011 I was able to deduct $1,360 more ($7,160 - $5,800) from my income by keeping up with tithing and being a little more generous than I would've been in the past.

The bigger deduction resulted in my tax liability being about $400 lower than it would've been had I only been able to take the standard deduction. This means my refund was $400 larger. Now, I know what you're thinking...this isn't a lot. 

But I. Feel. Amazing. For a few reasons:

1) I was able to successfully complete my New Year's resolution for 2011.

2) I was able to itemize and take just that much more of my mula back from the IRS...which honestly makes me want to start planning and saving for the next big itemization move...buying a home. I think it's great to set that up as a goal for myself at 25.

3) My refund is $400 bigger! It's not a ton of money but it's $400 the IRS would've had otherwise!

4) Giving is so much more fulfilling than I could have ever imagined. This is really the biggest reason (hence it's bold type font). Contrary to popular belief, I did not have to give up anything in order to give...and if I did, I didn't notice it. That's how happy giving made me. :-)

Happy itemizing and happy giving!

Tax Tantrum Tuesdays: Tax Time a Ticking

I was thinking...

December 31 is almost here. You know what that means? Tax time is almost upon us.

Last tax season I spent a lot of time writing posts around income taxes and how to understand yours (remember the red bottoms?). This year I'm hoping most of you have taken the time and energy to pay more attention to your income in order to minimize money wasted in witholdings and maximize tax deductions.

My goal for the 2011 tax year was to be able to itemize. Since I don't own a home yet and therefore can't deduct property taxes or home loan interest, I can't use that to itemize. But! Charitable deductions and state income taxes are both itemized deductions I can take advantage of. So...I challenged myself to do more charity (the state is already taking my money) through tithing. Aside from tithing, I've also given $$$ here and there to other charitable organizations. Since tithing was something I should've been doing anyway (because I believe in it) I found this to be a great motivator for me to stay on it.

Confession: I fell off...somewhere around July. However, all hope is not lost! As long as my last tithes are paid by December 31, 2011, they count towards my curent year return. And so....I will be making a bulk tithe payment before the end of this year to cover the tithes I've missed from August - December.

Your task: Think about what your income tax return will look like now! Did you have any major job changes, income shifts, new possible deductions, possible lost deductions, that may impact your 2011 taxes in a few months? Think about those things now. Doing this and reaching out to a knowledgeable tax professional (or doing the research on your own) may alleviate the stress that tax season brings most Americans. You won't be fearing the unknown (that you somehow owe the government some absurd amount of money).

Instead...you'll know just what to expect.

Tax Tantrum Tuesdays: Stay Out of Trouble

Another finance guru I absolutely love, Mellody Hobson, President of Ariel Investments in Chicago, talks about personal finances on Good Morning America from time to time. Specifically, I was reading an article discussing the IRS's increase in tax audits. Every person I know, including myself, should be very, very afraid of the IRS. Not afraid to the point that you are scared to try to do your own taxes, but afraid to the point that you don't ever want to purposefully lie to them. Ever.

When I hear of people lying to the IRS about small, insignificant things like filing single when you're actually married, claiming kids who aren't yours, claiming your kids when you know your 'baby momma' already claimed them, I send up a quick prayer...because if the IRS finds out, they're cleaning you OUT. Believe me, you don't want it. Most of the time, actually, ALL of the time, it's just not worth it.

With that being said, there are some obvious red flags that the IRS looks for when they're determining who to audit. Statistically, only about 1% of Americans with annual incomes under $100k get audited. The more money you make, the higher the probability that they will want to audit your return. Additionally, your return is more likely to get audited if you have big changes from one year to the next. It sends up a red flag. So if you start making a ton more money, claiming three children as dependents when last year you only claimed one, or claiming a large deduction/credit that you don't normally claim, BE SURE to keep those records.

Other more specific red flags for the IRS are:

• High expenses. A lot of expenses are deductible as itemized deductions. If any of these are abnormally high, like $60,000 in medical expenses, or $10,000 in work related expenses, you should make sure you have some great documentation to prove you're not lying.
• High charitable deductions. People use charitable deductions ALL the time to beef up their itemized deductions. Be careful. Make sure you have check stubs, receipts, letters from non-profits detailing how much money you gave them. Mellody says that the average charitable donation is around 2% of one's income...so if you're donating around 10%, that may be cause for concern.
• Errors. This is easily avoidable because of all of ability to e-file. But if you're still using a paper return, make sure to double check your math, make everything nice and neat as to not arouse any questions from the IRS.

In general, just be honest. It's much better for you in the long run. If you made an extra $10,000 cash doing some kind of side hustle, don't hide it. The amount of tax you'd pay on that would be far less than the penalties and fees the IRS will hit you with if they ever find out.

Tax Tantrum Tuesday: You Can Do It!

Tax Season is in full swing. And as of Monday, all of you itemizers can file. I'm a huge advocate for doing your own taxes, especially if you don't itemize. Paying any type of service or person to do them is a complete and total waste of money. In fact, a lot of my friends/family in the past have asked me to do their taxes...and while I've done some, I always tell them I'd much prefer to teach them how to complete their taxes themselves, instead of just doing it for them.

One of my friends actually took me up on that offer last year. I went up to her house after work and we sat down for an hour or so. I explained everything she needed to know about personal income taxes. She was a very excited learner which made me a super excited teacher :-)

I got a wonderful instant message today from her letting me know that I would be so proud of her because she completed her own 2010 tax return today in 30 minutes! I am in fact proud and it goes to show that you should not be afraid to touch your tax return. If you're nervous about getting it right on the first try, have a friend or tax professional look them over before you submit. As long as you complete everything in good faith, the IRS will not truck you off to jail. You'd be amazed at how much mone you can save...

...doing it yourself!

Happy Filing!

Tax Tantrum Tuesdays: The Tax Equation

So recently, we've been talking about a lot of different parts of the individual tax return. Below I've illustrated how all of these parts work together to complete your tax return. Honestly, understanding taxes is as simple as knowing and understanding this equation...and it is simple as pie:

Let me make sure you can read that the way I meant to write it:

It says... Income minus above the line deductions equals adjusted gross income, minus standard or itemized deduction minus exemption(s) equals taxable income, multiplied by your tax rate equals your tax liability, minus your tax credits, minus your tax payments equals the amount you are either refunded or the amount you owe.

I bet a bunch of y'all are finally happy you know what AGI is. lol

This equation helps you understand how deductions and credits work to help lower your tax liability. The goal of claiming deductions is to reduce your taxable income as much as possible. This means even if your income is $100k, you could have enough deductions to reduce the portion of that which you actually pay taxes on to about $60k. If your tax rate is 25%, wouldn't you love to only owe 25% of $60k vs 25% of 100k? Right.

Even once you get that taxable income down, tax credits are a way to reduce the amount of your actual tax. They are a dollar for dollar reduction. So if your tax liability is $10k for 2010 and you can take the $8k homeowners tax credit...now you only have a $2k tax liability. That my friends is a beautiful thing.

Payments are just your withholdings that you've been paying out of your paycheck all year. Remember the red bottoms? Say if you paid $9k during 2010 and your tax liability is $10k and you've taken the $8k credit to reduce your tax liability to $2k. That means a $7k return for you. On the other hand, if you paid in $9k during 2010, your tax liability is $10k and you have no credits. You will end up owing $1k.

Hopefully this equation shows you how all of these parts work together for (or against) your tax benefit.

Feel free to ask questions on this! I feel like it can still be a bit confusing :-)