If you are looking for a job in this economy, you know it can be a nightmare. One bright spot is that your job search expenses may be tax deductible. Read my latest Turbotax Blog article, In Search of a Job? You’re Job Search Expenses May Be Deductible to find out if you are eligible to save!

Finding a new job in this economy is certainly something to celebrate – but make sure your new salary keeps working for you.  My latest Turbotax blog article is titled Switch Jobs? How to Keep the Tax Man Away from (Some of) Your New Salary.

Another Turbotax blog article is up and it answers all the questions you may have about your IRA and how it affects your taxes. It’s called The Basics of Individual Retirement Accounts and Your Taxes. If you haven’t started contributing to an IRA, this article also tells you why contributing to an IRA is so beneficial.

My second article is up on the Turbotax blog. It’s called It’s Never Too Early: Five 2011 Tax Tips and includes helpful advice like how you can lower your tax bill and save for retirement at the same time! Read it here and prepare yourself for 2011.

Although your 2010 taxes aren’t due until April 15, 2011, you pay taxes all year long.  So it’s never too early to brush up on your tax knowledge. I’ll be writing periodically for the Turbotax blog.  Check out my first article there titled What is the Capital Gains Tax?

A few weeks ago, I put a poll up on this site (you can still see it to the right) asking the question How do you feel about how much tax you pay?

While it’s admittedly a non-scientific poll, the same could be said about the voting for the final roster spot on Major League Baseball’s all-star team.

You: But at least there were millions of votes.

True, but not necessarily millions of voters.

You: Point taken.

Remember, no one knows you’re a dog on the Internet.  Anyway, the results were a bit surprising, as more than three-quarters fell voted “My tax burden is too high.”

You: Why did that surprise you?

With half of all Americans paying no income taxes, I thought I’d see more people happy with their tax burden.  True, it’s a small non-scientific sample.  Aside from the aforementioned caveats, why do you think the results are as they are?  Have you voted yet?

You: You mean there’s a choice?

Not really.  While it’s possible to structure some of your financial affairs to lessen your tax burden, most high-income earners will still pay a lot in taxes while those at the lower end will pay far less.

You: So then why ask what the right amount of taxes to pay is?

I’m thinking on more of a macro basis.

You: What?

As a society, how much tax is appropriate?  I just finished reading “Do Americans Pay Too Much in Taxes?” at Kiplinger.  Like many of the commenters, I believe he underestimates the current tax burden in his discussion, but I’m not as angry about it as they are.

You: Why not?

What’s the point of getting angry at a columnist? If you want to make a difference, talk to someone in a position to make a policy difference. (I generally do neither.) Regardless, it raises the question of how much tax is appropriate.  A typical middle income taxpayer might face:

• 25% income taxes on his wages (at least for a sizable portion of his income)
• 7.65% payroll taxes (Social Security and Medicare) that he sees withheld from his paycheck
• 7.65% payroll taxes (Social Security and Medicare) that he doesn’t see withheld from his paycheck
• 8-11% income taxes, in a number of states, in state income tax
• up to 10% (like in Chicago) sales tax
• thousands of dollars in annual property taxes (paid directly as a homeowner or as part of your rent as a renter)

Add all of these taxes together and they’re often a far higher percentage of your earnings than you might first sense.  Furthermore, there are other, comparably more minor, fees and taxes the typical person pays.

I live in New Hampshire, a state with no income or sales taxes.  People from out of state sometimes ask me how my state’s services are.  When I ask them to describe their state’s services, we realize no one is happy there.  Still, I don’t have all the answers, do you?

Do you pay too much, too little, or just the right amount of taxes?

I just saw the article “Earn Tax-Free Income” over at Forbes.  It’s a clever topic and the piece actually delivers.  While some of the suggestions are not for those without resources (e.g., buy an apartment building), you may find that you already doing others (e.g., using a cash-back credit card).  Yet it’s a comprehensive list and I suspect every reader will find a category of untaxed income to take advantage of – at least in some capacity.

With income tax rates certain to rise eventually, generating legally untaxed income is likely to become an important part of your financial plan.  What else are you doing to prepare yourself from the eventual hike in income tax rates?

Although Friday comes every week, Friday Q &A comes around only when someone submits a good question AND I have time to answer it.   Both happened this week, so here we go. Want to ask a question?  Click here for more information or simply email a question.

I plan on buying a  home from my parents that wasn’t their primary residence, it is a rental property. I understand that I wouldn’t be able to get the $8,000 credit because my parents owned the home. What if an unrelated person bought the home from my parents but doesn’t qualify for the First Time Home Buyer Credit, and then I purchased the home from them later to get the $8,000? Is there any restrictions on trying to get the credit this roundabout way?

Thanks,

Paul

Straightforward Answer: Sounds like fraud.

Detailed Explanation:

As you are aware, any home purchased from a close relative, a definiiton that includes a parent, disqualifies you from the first time home buyer tax credit.  Technically, what you are saying – have a parent sell it to someone else and then you buy it from that person – is possible.  There’s nothing remotely illegal about it. But if it’s done solely to get the credit?  Doesn’t pass the smell test?

Transactions that are entered into solely for the purpose of tax avoidance aren’t well-received by the IRS.  Surely, that won’t really surprise anyone. For tax geeks:

Transactions entered into solely for the purpose of tax avoidance, which lack any business purpose, are shams and without effect for Federal income tax purposes. Frank Lyon Co. v. United States, 435 U.S. 561 (1978); Knetsch v. United States, 364 U.S. 361 (1960). The leading case supporting the existence of a “sham transaction doctrine” is Gregory v. Helvering , 293 U.S. 465 (1935).

Furthermore, calculate the transaction costs – real estate commissions, recording fees, etc.  My guess such expenses will cost more than $8,000.  So don’t bother. Want the credit?  Buy a different house. Or buy your folks’ home and forget about the $8,000.

FYI, there are over a thousand comments on my other first time home buyer tax credit posts, many of them are of a Q & A nature.  You can check them out here:

• First Time Home Buyer Tax Credit – 2009 Version
• First Time Home Buyer Tax Credit: When a credit isn’t a credit but it’s still free money
• First Time Home Buyer Credit – Your options if you buy after April 15

Line 10 of Form 1040 says “Taxable refunds, credits, or offsets of state and local income taxes.”

You: So?

So this is where most people put their income tax refund they received.

You: Isn’t that where it goes?

Yes, if it’s taxable.

You: Why wouldn’t it be taxable?

A few reasons actually.  First let me explain the concept for why a state income tax refund might be taxable.

Say you itemized deductions last year. This part the state income taxes you paid.  Then, you find out that you overpaid your state income taxes and you get some back – that’s your refund.  The feds say, “That’s not fair – you already deducted those taxes and they weren’t really taxed you owed – you got them back. So, give me back that deduction you took.”   To do so, you have to include the refund in income the next year.

But not everyone falls into this neat simple case.  Some have more confusing facts.

You: But if I have more confusing facts, won’t my tax software catch this issue properly?

It should, but it might not. It will partially depend on whether you did your return last year with the same program and what data you enter where.

You: What if I used a paid preparer?

I’ve seen paid prepares miss this too – twice in the last three weeks.

You: So what might cause my state income tax refund to not be taxable?

One example: If you didn’t itemize last year, you don’t have to pay tax on your income tax refund this year. This is true – even if you do itemize this year.  That’s just one reason why every competent tax preparer requests a copy of your prior year return if he/she didn’t do it.

A second reason: you might be in AMT.

You: What’s AMT?

The alternative minimum tax.

You: Is that a bad thing or a good thing?

Mostly, it’s a bad thing – except when it comes to state income tax refund, when it’s a good thing.

You: Huh?

Taxpayers in AMT don’t receive any tax benefit from their state income tax deduction.

You: That part sounds bad.

It is bad.  But, as a result, part or all of their state income tax refund isn’t taxable the following year. Figuring out how much of the income tax refund is taxable is a complicated process that more or less requires one to recompute the prior year’s tax liability as though the amount previously deducted for regular tax purposes was not.

You: If I understood you correctly, that’s crazy.

I agree. If you understood that last sentence, that is crazy.

You: That’s not what I meant.

I know.  Nonetheless, don’t just absentmindedly include that refund.  You might just overpay on your taxes. To me, that’s crazy.

Total Candor Tax Prep has capacity for just a few more tax clients this year, so if you want in, please contact us soon!  Our rates are right on our site as are answers to frequently asked questions.