I’m looking for advice or factual information, and I’m not sure which I need more, so this is in IMHO.
I rent an apartment, have no outstanding debts or expenses. So I’ve been using the 1040EZ form.
What have the Teeming Millions in a similar situation found to be the easiest way to reduce taxable income and move on to the more complex Income Tax forms? I’m assuming that charitable giving would be the number one way and that a threshold of giving must be crossed? Is there anything else you’ve done?
There’s nothing “better” about the more complex tax form. It’s really just more complex, it means you have a more complex financial situation.
But if you’re dying to use the 1040 rather than the 1040EZ, you could:
become a teacher and start buying supplies out of pocket
own your own business (along with that, pay your own retirement plan)
pay alimony
get alimony
buy a farm
become a landlord
go to school, pay a lot in tuition and then later pay a lot in student loans (in a not high paying job)
get transferred to a new city for work and have the job refuse to pay for the move
play the stock market
have a catastrophic illness
get robbed (with no or poor homeowners or renters insurance)
be on the wrong side of an act of God (tornado, earthquake, volcano - again with no or poor insurance)
give to charity (over $6000 if you’re single. over $12000 if you’re married. $100 to the March of Dimes isn’t going to change your taxes).
buy a house in a market with reasonably expensive houses
get a really expensive hobby that has the potential to both make & lose money (like horse breeding)
become a professional poker player
have a lot of children
adopt at least one child
have a complete financial collapse
basically go through the 1040 form and look for lines that aren’t on the EZ form that you can fill in. The ease of any of them is dependant on your talent, skill, luck, care, carelessness, and current financial state.
Thank you for the perspective. I wasn’t sure if there were good reasons to have to fill out the 1040. None of the reasons you offered were ones I’d gladly take up at this time.
State taxes are deductable, and we have found that in many cases, they are high enough to itemize all by themselves. State income tax (OR sales tax) Auto taxes and others- in CA there’s CASDI.
And, you don’t have to have receipts for all your charitable donations.
The list looks pretty complete to me. Deductions come out of spending money on something the government is more or less subsidizing. If you don’t spend the money you are ahead, assuming it isn’t on something you need anyhow.
BTW you don’t have to have a catastrophic illness to take a medical deduction, just medical expenses greater than a certain percentage of your income. Check your health insurance costs against this. I’m nowhere near the limit, so I’ve never looked at this very closely.
Does your employer have a 401(k)? Are you contributing to it? Your contributions come from pre-tax dollars, and therefore your taxable income goes down. No need to fill out a different form.
Insurance alone will rarely exceed the exclusion. Only that portion of Medical expenses that exceeds 7.5% of your AGI are deducible. I only made it one year, the year I had Lasiks.
Depending on what your definition of “receipt” is, this isn’t entirely true (not picking on you, DrDeth, just being pedantic). If the IRS chooses to audit your charitable deductions, you do indeed need to have a receipt, cancelled check, credit card statement, or acknowledgement from the organization for the deduction to stand. In other words, when you file your taxes, you don’t have to have a receipt for anything; your tax return is on the honor system – that is, until the IRS chooses to audit it. At that time, if you don’t have sufficient documentation to back up your numbers, the IRS will disallow it and charge penalty and interest on top of it.
For charitable contributions specifically, the IRS is cracking down and generally does not allow deductions for strictly cash contributions without backup (e.g., $10 put in the Salvation Army kettle). Contrary to widely held belief, there is no “you get the first $500/$250/$x amount free” with no required backup.
My Bro, who worked for the IRS for 20 years, never had a problem with allowing “out of pocket cash contributions” within a reasonable limit of say $100 person. Plus reasonable non-cash donations.
And, any deficiency of under $50 (or $100) is not assessed or asserted. Thus, even if they did disallow your $100 of out of pocket donations, you’d owe nothing if that was you only issue.
If your Auditor disallows them (and they can do so) then say “I want to go to Appeals”, where they will almost certainly be allowed- again, if they are reasonable and small.
And, you can have even larger amount allowed if you got a letter from your (legit) pastor etc saying that you were a regular churchgoer, known for your generous cash donations.
I want to point out that Cohan vs. Commissioner, 39 F. 2d 540 (2d Cir. 1930) still stands.
A Negligence or Fraud Penalty on reasonable but not fully documented charitable donations would never stand up.
Now, this is not a license to claim donations you did not make. But it can be Ok to claim a few reasonable donations without an actual receipt. **Consult your tax professional. **
A key point to understand about deductions in general …
You can either itemize your deductions, or take the standard deduction. You can’t do both.
For a single person in 2009, the standard deduction is/was $5700. It’ll likely be very similar next year since inflation is likely to be near zero. Let’s just assume you’re single, and that the 2010 standard deduction will still be $5700.
So let’s pretend you buy a house/condo in 2010 and your total outlay for interest in 2010 happens to be $5699. All of that is deductable if you itemize, but you give up the standard deduction if you do. You’re better off taking the standard deduction since it’s a dollar more.
Now let’s say your interest expense is $5701. Now you’re better off to itemize.
But here’s the key point a lot of people forget. They tend to think “Hey, I spent $5701, but at least I got to write it all off & save a bunch on my taxes.”
Well, no, actually. You spent $5701, of which you got to write off $1 extra beyond the standard deduction. You thereby saved 15-25 *cents *on your taxes.
The desire to reduce your taxes is good. But until you have over $5700 of total itemizable expenses, you got nuthin’. And you can’t really direct your spending in a way to create deductions that large except by mortgage interest deductions. The 7.5% floor on deductible medical expenses and the 2% floor on deductible other expenses doesn’t leave much practical opportunity for deducting anything other than mortgage interest, charitable giving, and non-federal taxes.
Once you’re going to buy a house / condo anyhow, having >=$5700 in mortgage interest suddenly makes your state sales or income tax available as an additional deduction. And now all your charitable contributions become deductible. And IF by some chance you have a medical disaster, some of that becomes deductible. And IF you have unusually large legit employee business expenses, some of that becomes deductible too.
Bottom line: The attractiveness of deductible expenses is highly overrated by people who take the standard now, or who only have a few thousand dollars of deductions beyond the standard. Spending thousands of dollars to save dozens of dollars on taxes is a fool’s game.
In general you are absolautely right, and I take no issue with anything you’ve said.
However, there are exceptions, and I hppen to be one of them. First of all, the amount I pay in state income taxes, all by itself, exceeds my standard deduction.
Second, I am in the unfortunate position of having my medical expensese for 2009 exceed 7.5% of my income by a large margin.
This is how it happened that it was still advantageous for me to itemize deductions for 2009 even though I do not pay any mortgage interest (my house is paid off).
What LSLGuy said about the utility of itemizing deductions. The only reason to go there is if you’re doing things that are taking you there anyway.
The biggest single thing that tends to put most people into itemizing territory is buying a house. Most owners need to itemize; most renters are well below the threshold. When you first buy, your payments are almost 100% interest, so even if your mortgage is an astonishingly low $400/month, that’s nearly $4800/year that’s deductible. Add in $1000 in property taxes, and you’re over the $5700 threshold.
Then it becomes worth keeping track of the other stuff: state/local sales or income taxes, charitable contributions, etc.
But don’t buy a house because you get to itemize. Buy a house, or keep renting, because that’s what makes sense for you in general.
Interesting; I had never heard that about the $50/$100 deficiency not being assesed or asserted. Even as a longtime tax pro, the inner workings of the IRS are very mysterious to me, as I’m not heavily involved in the audit side at all (although several of my colleagues are).
It’s generally only been drilled into my head what is publicly put out by the IRS, which the latest version is (from their website):
Beyond the black and white of what this says I couldn’t say, so your brother’s experience as an auditor provides interesting insight to how things work “in real life”.