Understanding the federal budget

Note: Although I try to keep GRS a politics-free zone, today's topic is inherently political. I've stayed as neutral as possible in the article, but I know that there'll be some political discussion in the comments. Please keep conversation civil, as always.

Recently at The Simple Dollar, Trent posed the question, "How much do taxes matter to you?" As might be expected, his readers responded with passionate comments from both sides of the political spectrum. The discussion frustrated me, though. There's just too much misinformation, and people offer their opinions as if they were facts.

I'm as guilty as anyone else.

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More about...Economics, Taxes

How marginal tax rates work

Yesterday I hosted a guest article about the mortagage-interest tax deduction. As part of his argument that this tax break should not be used to justify buying a house, CJ from Wise Money Matters looked at the savings by tax brackets. What CJ did not consider (and what escaped my notice, and even that of my accountant) was the concept of marginal tax rates.

Although I was mortified to have let such a blatant error pass through editing, I decided to turn this mistake into a positive experience. I spent some time reading about marginal tax rates, and today I'm going to share what I learned.

Marginal Tax Rates

Let's start by looking at the 2009 U.S. federal income tax brackets for ordinary income. (These are the rates we'll use when filing our tax returns in 2010.) For the sake of simplicity, we'll only examine the rates for single filers and for those who are married filing jointly. The same principle applies to all filers.

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More about...Taxes

Why you shouldn’t keep a mortgage just for the tax deduction

This is a guest post from CJ at WiseMoneyMatters.com. This post represents CJ's viewpoints, which are not necessarily my viewpoints. (Although I, too, hope to pay off my mortgage early.)

Note: This is embarrassing. I don't think I've ever had a post with an error like this slip by me before. I apologize. I've removed the offending section, not out of any attempt at revisionism, but out of interest in accuracy. Please let me know if the piece is still mathematically unsound. (And a sincere "thank you" to those who caught the error!)

The other day, I was telling my wife's grandmother that we had sold our house. We are downsizing in order to eliminate our mortgage more quickly. It looks like we will have our mortgage completely paid off in three to five years, depending on when kids enter the scene. She gave me a speech about how our house is one of the only tax deductions we have, and how most accountants recommend you keep a mortgage payment for that reason.

I think this logic is misguided. Let me show you why.

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More about...Taxes, Home & Garden

Tax-Loss Harvesting: How to Use the Market Downturn to Save on Taxes This Year

J.D. is on vacation. This is a guest post from Linden Cornett. Linden is a Portland-area professional with an interest in finance.

The stock market is down this year, and many people have asked me if I've made any changes to my investments as a result. My general strategy is to buy-hold-rebalance my stock and bond investments, so I've mainly used this downturn as an opportunity to buy stocks at bargain prices.

There is one tax strategy that I'd recommend to anyone who has losses in a taxable account. I've already done this with a few of my investments, and maybe you should too. The strategy is known as “tax-loss harvesting”, and here's how it works.

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More about...Investing, Taxes

Mr. Lawyer and Mr. Accountant Chat About Taxes

On Friday, I stopped by the office of my friend, Mr. Accountant. Another friend, Mr. Lawyer, was there, and the three of us fell into conversation. "How's the web site going," asked Mr. Accountant.

"Good," I said. "But I'm stuck on something. Maybe you can help. On Monday, I'm supposed to share my best piece of tax advice. I don't have a best piece of tax advice. I don't know much about taxes at all. Do either of you have a best piece of tax advice?"

"One thing I see a lot," said Mr. Lawyer, "is people who don't understand how taxes work. They don't know how they're figured, so they have way too much or way too little withheld from their paychecks. They don't understand the process. My best piece of advice is to take a little time to determine your tax situation at the beginning of the year so that you can get your withholding right. Then there won't be any surprises at the end of the year."

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More about...Taxes

Calculate Your Economic Stimulus Tax Rebate

President Bush has signed the economic stimulus package into law. This plan provides tax breaks to businesses that invest in capital equipment, temporarily allows larger mortgages through the Federal Housing Administration (and related entities), and provides a personal income tax cut for 2008. Instead of passing this on when we file taxes next year, the IRS will mail a tax rebate check to most Americans this summer. This is an advance on the reduced taxes for 2008.

How much will you get back? Flexo at Consumerism Commentary recently shared a handy little tax rebate calculator, which I've reproduced below:


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More about...Planning, Taxes

A Brief Overview of the Alternative Minimum Tax

It's the time of year to start talking about taxes. I used to do my own taxes, but it was always a frustrating experience. Eventually I learned that by paying somebody else to do them, I was actually saving money. Because my accountant actually knows what he's doing, he gets all the deductions I'm entitled to.

This year, I've heard a lot of talk about the Alternative Minimum Tax (or AMT). Every time I begin reading about the AMT, my head swims. Fortunately, a couple of other people do understand the AMT and have written about it lately. First, Nickel sat down and answered the basic question: What is the Alternative Minimum Tax? He writes:

The AMT is a parallel tax system with rates ranging from 26%-28%. If your liability is higher under the AMT than under “standard” income taxes, then you have to pay the AMT. Given that standard tax rates top out at 35%, this doesn't sound too bad. Unfortunately, the AMT also disallows many routine deductions, resulting in a potentially large tax liability.

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More about...Taxes

A Contrarian View: Why I Love a Huge Tax Refund

Kris and I received $2789 in tax refunds this year.

Already I can hear the sound of hundreds of heads thumping against hundreds of desks. Many of you are wailing, "Why?! Why?! Why?!" Of all the financial choices a person can make, getting a large refund is universally considered one of the dumbest. Magazines advise against it. Books advise against it. Blogs advise against it. Yet every year, millions of Americans like me use their tax refund as a sort of forced savings account.

Why do we do it?

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More about...Taxes

Original income tax form from 1913

In 1913, Wyoming ratified the 16th Amendment, providing the three-quarter majority of states necessary to amend the Constitution. The 16th Amendment gave Congress the authority to enact an income tax. That same year, the first Form 1040 appeared after Congress levied a 1 percent tax on net personal incomes above $3,000 with a 6 percent surtax on incomes of more than $500,000.

— A Brief History of the IRS

It's February. Tax season is in full swing. Employers, banks, and investment firms have mailed out W-2s and 1099s and other miscellaneous tax documents. These are beginning to pile up on kitchen tables across the country. Over the next few weeks people will sit down to puzzle out their tax situation. Continue reading...

More about...Taxes

Which financial records to keep (and how long to keep them)

An AskMetafilter user wonders how long to keep receipts:

I have been keeping all of my receipts for some time now. Every day, I enter them into my money tracking system (presently just a text file where I capture date, payee and amount). Then I file the receipts away in folders by month. My question: does it do me any good to save the receipts, or is having the data good enough? [...] I've never had to bring out individual receipts for tax purposes before, but my understanding is that if I got audited, having all my receipts would be very helpful. Is that true?

Bankrate has an excellent table summarizing how long to keep financial records. To summarize:

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More about...Taxes