Tax Question

[becka]

Wow there are lots of tax questions on the board today...must be getting close to the end of the year.

I am looking at our tax situation in preparation for next year and I have a few basic questions I am hoping that some of you can help me with.

This is the first year we have owned a house so I don't really understand how the mortgage interest is going to help us. Doesn't the mortgage interest have to be more than the standard deduction to help you?

I don't have our actual numbers but if I estimate that we paid 6000 in interest this year (for 10 months) - isn't that less than the standard deduction and it means that buying a house did zilch for our tax situation?

Also this is the first year with our DS and I was wondering how the child thing works. Do we get so much taken off of the amount of taxes we pay or does it just lower the total amount we pay taxes on? Same thing with the child care credit for daycare?

Thanks in advance!

 

[Steve H.]

Give me a couple minutes and I can try to give you detailed answers for all your questions -- it'll take a little while to research and type out though.

 

[Steve H.]

Question 1: Yes, your mortgage interest + points + property taxes must be greater than the standard deduction (unless you have other deductible expenses, which is probably unlikely). The standard deduction for 2001 was $7,600 if you were filing jointly (I can't find the 2002 figure right now, but it's probably a bit higher).

The one thing you might not be factoring in is that property taxes are also deductible, along with any points you may have paid when you obtained your loan.

Here's a link for new homeowners: http://www.irs.gov/formspubs/page/0,,id=11963,00.html

 

[coqui]

Well I do know you can add stuff regarding your closing costs into this factor.

Also unless your mortgage is around $600/month (assuming a 30 yr mortgage) you may want to check it. Your first few years are almost exclusivly all interest payments.

It is very hard for homeowners to be below the standardized deductions for their itemized deductions (You can include Interest on your home, points, any investments, your local and state income tax)

Maybe I'm wrong but I don't see the possibility.

 

[Toby'sFriend]

I'm going to let Steve handle it because I have a bit of a headache today.

But basically,

Deductions = amounts you can subtract from your taxable income
Credits = amounts you subtract from the actual tax you owe.

I hope that helps.

 

[Steve H.]

Question 2: The child tax credit is a dollar-for-dollar reduction of the tax you owe. I forget if it's limited by your level of income, but it's a maximum of $500 per child.

Edited -- yes, it is limited by AGI (Adjusted Gross Income). There's a relatively simple calculation to determine whether or not you qualify for the maximum credit which will be on the 1040 form.

 

[TheLionKing]

If you itemize, you will be able to take off your mortgage interest, property taxes, state taxes, safety deposit box (depending upon your AGI) and charitable deductions.

Obviously, the itemized deductions do need to be more than the standard deduction. Those deductions are taken off your Adjusted Gross Income.

That is why you will read that the government is "paying" a certain percentage of your mortgage interest. The percentage paid depends upon which tax bracket you are in.

I am thinking that the deductiuon for your child goes directly to lower the amount of taxes you pay on a dollar for dollar basis unlike your mortgage deduction.

I don't know where you take a deduction on child care......

Sounds like you may need to get one of those computer tax filing programs. They are pretty good to make sure you get all the deductions you can claim.

Just keep all those forms you will be getting telling how much interest and payment you made last year and put them all in one place when you are ready to fill out your form.

 

[Steve H.]

Question 3: Child-care credit. This is a little more complex a topic, because the first thing you have to do is determine if you qualify for the credit. Here's the checklist from the IRS:

To be able to claim the credit for child and dependent care expenses, you must file Form 1040 or Form 1040A, not Form 1040EZ, and meet all the following tests.

The care must be for one or more qualifying persons who are identified on the form you use to claim the credit. (See Qualifying Person Test.)

You (and your spouse if you are married) must keep up a home that you live in with the qualifying person or persons. (See Keeping Up a Home Test, later.)

You (and your spouse if you are married) must have earned income during the year. (However, see Rule for student-spouse or spouse not able to care for self under Earned Income Test, later.)

You must pay child and dependent care expenses so you (and your spouse if you are married) can work or look for work. (See Work-Related Expense Test, later.)

You must make payments for child and dependent care to someone you (or your spouse) cannot claim as a dependent. If you make payments to your child, he or she cannot be your dependent and must be age 19 or older by the end of the year. (See Payments to Relatives under Work-Related Expense Test, later.)

Your filing status must be single, head of household, qualifying widow(er) with dependent child, or married filing jointly. You must file a joint return if you are married, unless an exception applies to you. (See Joint Return Test, later.)

You must identify the care provider on your tax return. (See Provider Identification Test, later.)

If you exclude dependent care benefits provided by your employer, the amount you exclude must be less than the dollar limit for qualifying expenses (generally, $2,400 if one qualifying person was cared for, or $4,800 if two or more qualifying persons were cared for). (See Reduced Dollar Limit under How To Figure the Credit, later.)

Basically, if you and your spouse work, it's your child, you are paying a qualifying daycare provider (e.g. not another dependant) and you file as married filing joinly, then yes, you qualify for the credit.

As far as how much you can claim as a credit -- it's a percentage (ranging from 20-30%, based on earned income) of the following qualifying expense amounts: $2,400 for one child, and $4,800 for 2 or more children.

Here's the official IRS publication for reference: http://www.irs.gov/formspubs/page/0,,id=11565,00.html

 

[Steve H.]

BTW -- I'll ditto TLK's advice about getting some tax software.

I would recommend getting a copy of TurboTax when the 2003 software comes out (2002 tax year). Get the Deluxe version, since it'll come with State tax software as well (plus free e-filing, etc.).

I find that TurboTax is pretty good at walking you through all the necessary questions in regards to deductions and credits.

 

[ryanpatricksmom]

If you have $6000 in mortgage interest, that coupled with any property taxes, and your state income taxes withheld would more than likely exceed the standard deduction. Anything else (prepaid interest "points", charitable deductions, etc. ) will be gravy....so you're already ahead due to purchasing a house.

 

[Kermit]

You should at least fill out all of your info in the itemizing form to see if you can get together more than the standard deduction. Don't forget that tithes to church, donations to Goodwill, and all other charitable contributions are tax-deductible. And as others have mentioned, property taxes count too. The first year we lived in a house and decided to try it, we expected we'd just about break even with the standard deduction, but after we read through the form and saw all the stuff we could deduct, we realized we were coming out way ahead by itemizing.

And don't worry if you realize that you paid a lot of deductible expenses and didn't record how much you paid. I think everyone has done it. Next year you'll have a better understanding of what's deductible and you'll save proof so that you'll have it at tax time. Getting a receipt when you drop stuff off at Goodwill has helped us a lot. I never realized how much stuff we took there in a standard year until I started getting those.

 

[peg2001]

Another vote for TurboTax! It will lead you through each of these things one question at a time. The only SANE way for us to do our taxes each year. Our only saving grace is that Tennessee does not have an income tax. . .yet.

Peggy

 

[janette]

I do my own taxes using Turbo-Tax. Pretty easy and has input for all the different forms you get. I was a little concerned last year because we bought & sold a house but it was fine.

I think you have most of the information the only thing I'd add is that if you have a Dependent Care Spending account at your work it is a usually a better deal than the tax credits. They will take money out of your check pre-tax and you submit the receipts or get vouchers to pay your child care provider. The limit is $5000 even for one child. I've always had them for child care and it works great, they are usually part of your benefit signup at this time of year. This is the first year I haven't maxed mine out but I'm not paying child-care anymore so that's okay

There are also health spending accounts that are a little more difficult because it's hard to know how much you'll spend. The money is a use it or lose it type so you don't want to put too much in.

 

[Amusement Park Junkie]

One additional comment about "points". They are only deductable in full for the initial loan on the house. If you refinance your loan (and a lot of people are these days) and pay points on the refinance, you have to break down that deduction over the course of the loan. Take 1 30th of the points as a deduction for each year if it is a 30 year refinance.