Jeff's Personal Finance Basics #56 ?... | Gather

by Jeff S.

Member since:
August 16, 2008

Miscellaneous tax topics

This is a collection of miscellaneous tax topics that I have gathered over the years.? As such, they are quite random.

Timing of tax event

Capital gains treatment ? sale of your investment or capital assets (rental real estate, stocks, bonds, mutual funds, etc.) is determined by the length of time each item is owned.? If I buy a stock for $5,000 and sell it for $10,000, I realize a profit of $5,000.? If I kept the stocks for less than 12 months, I would pay ordinary tax rate ($1,250 if 25% tax bracket).? If I kept them in 13 months, and then sell it, I would receive capital gains tax treatment ($750 if 25% tax bracket;? $0 if 15% tax bracket).? So keep this in mind when selling your investment.

Collectibles are taxed in two different tax brackets:

• Short-Term Collectible Capital Gains Tax Rates: Collectibles held less than one year are taxed at personal income tax rates, just like short-term capital gains taxes on stocks or bonds.
• Long-Term Collectible Capital Gains Tax Rates: Collectibles held one year or longer are taxed at 28%. Thus, if you bought a Picasso for $100,000 several decades ago and sold it for $20,000,000 today, you would owe $5,572,000 in capital gains taxes ($20,000,000 sales price - $100,000 purchase price = $19,900,000 capital gain x 28% = $5,572,000 capital gains tax liability).
• Gold and Silver Are Taxed as Collectibles - Gold and silver bullion and gold coinsare taxed at the same capital gains rate as collectibles. This includes Gold ETFs and Silver ETFs. Investors make a very real mistake assuming they will be able to pay the lower capital gains tax rate that is paid on stocks and bonds, sometimes causing them to experience painful surprises come tax day.

Itemized deductions - It?s difficult to itemize deductions these days ? but is easier if you are single and own a home.? For 2011, the standard deduction is $11,600 for married filing jointly, and $5,800 for a single taxpayer.? To qualify for itemized deduction, the following deductions must exceed your standard deduction: property tax, mortgage interest, charitable donation, and medical expense greater than 7.5 percent above AGI.

So if you are married, owned a $100,000 mortgage with 5 percent mortgage, paid $4,000 in property tax, and donated $2,500, your total deduction is $11,500, you are $100 shy of being able to claim itemized deduction.? But if the taxpayer is single in a 25 percent tax bracket, he would be able to claim $5,700 (= $11,500 - $5,800) or $1,425 in extra tax refund (=$5,700 x 25%).

Non-taxable income - Many types of income are not taxable and I don?t have the space to list all of them.? I list some major types here:

• Inheritance
• Life insurance proceeds
• Company matching contribution on 401(k) or 403(b), and Roth IRA gains
• Proceeds from employee paid disability insurance
• Social Security distribution if total income is below certain threshold
• Medicare and medical insurance proceeds used for medical expenses
• Gift received from an individual up to $13,000 per person per year
• Capital gains for taxpayers in 10% or 15% tax bracket (2011 and 2012)

Tax credits - Many tax credits exist in the tax laws, but here are some personal tax credits that may apply to individuals

• Earned Income Credit: up to $5,800 per family with 3 or more children
• Credit for the elderly and disabled: maximum credit is $1,125
• Retirement savings credit: limited to $1,000
• Mortgage interest credit: limited to $2,000,
• Child credit: a credit up to $1,000 per qualifying child.
• Child and Dependent Care credit: a credit up to $6,000 ($3,000 per child).
• Credit for adoption expenses: up to $13,170, phased out at higher income
• The American Opportunity Credit
• Lifetime Learning Credit

Best tax deal - In my humble opinion, the best tax gain can be achieved by contributing the maximum amount into a 401(k) plan, ?if you are in the 25% tax bracket (or higher), and can afford to save. ?Example is a working couple in the 25% tax bracket who are in their 50s. ?They may contribute up to $22,000 each into their 401(k) plan this year. ?With a company match of 3% and gain of 10% a year, this couple can net a total tax savings of $11,000. ?Add $3,600 in company match, plus $1,100 in gain, this couple can net almost $60K in savings simply by contributing $44K into their 401(k) plans.

Topics I plan to cover in this series of Personal Finance Basics include (but not limited to):?Financial Planning, Investing, Insurance, Income Tax, Retirement, Benefits (entitlements and company benefits), spending, saving, and giving, to start.

Next post will start a series on retirement

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