Refundable and Non-Refundable Tax Credit in Charts
One thing I’d like to learn to do a better job of this year is to communicate more effectively with visuals. A good picture is worth 1,000 words. In some of my old posts, I wrote 1,000 words but people still keep asking the very question I attempted to address. Clearly I wasn’t effective in getting the point across with 1,000 words.
The post Refundable Tax Credit and Non-Refundable Tax Credit is one of those posts. Let me try again with some charts.
New Tax Forms and Schedules for 2009 Tax Year
Form 1040 for 2009 tax year has two new schedules.
Schedule L is used for claiming (a) the additional $500 or $1,000 tax deduction for property tax paid, (b) the sales tax paid on a new car purchased between Feb. 17, 2009 and December 31, 2009, and (c) a net disaster loss (together with Form 4684).
Schedule M is used for claiming the Making Work Pay tax credit. Making Work Pay tax credit is the $400/$800 tax credit added in the economic stimulus law.
While we are at it, here’s a list of the tax forms you will need for the various new tax incentives for 2009 tax year. » Read more …
The Origin of Solo 401k
As I wrote in a previous post Rollover IRA to Solo 401k, I rolled over substantially all pre-tax money in my traditional IRA to my solo 401k plan in 2009. My traditional IRA was left with non-deductible contributions plus a little bit of earnings. For 2010, I made another non-deductible contribution before I converted the whole thing to a Roth IRA.
Because the traditional IRA had mostly non-deductible contributions, I will not pay much tax for this conversion. I plan to do the same contribute-then-convert move in 2011 and beyond unless Congress changes the law.
Having a solo 401k made things easy for me. This post is a sidebar about the history of solo 401k.
What Is Your Marginal Tax Rate?
If I ask you point-blank "what is your marginal tax rate?" do you know the answer? If you think you know, write it down. If you are not sure, take your best guess. After you finish reading this post, see if you got it right.
The marginal tax rate is the tax you pay on your last dollar earned. It’s an important number to know because at the end of the day, if you earn one extra dollar, what you can put into your own pocket or spend after taxes are paid is what really counts. That number would be 1 – marginal tax rate.
If my marginal tax rate is 95%, I will not bother putting in the effort to earn that one extra dollar because it’s just not worth it for me to net only 5 cents. I’d rather relax and enjoy my leisure.
Marriage Tax Penalty and Unit of Taxation
The marriage tax penalty refers to the fact when two people marry, they pay more taxes than they do when they are single. This happens when the two persons have roughly the same income.
The mirror image of the marriage tax penalty is the marriage tax bonus, that is when two spouses have disparate income or one spouse decides to stay at home, they pay less tax than they do if they don’t marry.
I touched on the topic of marriage tax penalty in two previous posts: » Read more …
Rollover IRA to Solo 401k
It looks like the Roth IRA conversion rule changes will stick, at least for 2010. There are only three months until the end of 2009. Congress is busy with something else. I don’t think they will repeal the current law before the end of the year.
In preparation for converting my non-deductible IRA contributions to Roth IRA in 2010, I’m rolling over the pre-tax portion of my traditional IRA to my solo 401k. I set up the solo 401k last year primarily for this purpose — to provide a harbor for my pre-tax IRA money so I won’t get taxed proportionally on my Roth conversion. After the rollover, I should have only one small IRA, consisting of my non-deductible contributions plus or minus market fluctuations from now until I convert in January 2010.
I have my solo 401k with Fidelity. When I called them about the rollover procedures, to my surprise, the rep actually discouraged me from doing so. To his credit, he made valid points. He knew what he was talking about. Fidelity trained them well.
Tax Credit for Buying a Hybrid or Diesel Car
Reader Nate asked in a comment to my previous post Refundable Tax Credit and Non-Refundable Tax Credit about the tax credit for buying a VW Jetta TDI. I thought I’d put it in a separate post in case others are also interested.
The government gives tax credits for buying a "green" car. If you are not buying a "green" car, you don’t get a tax credit, but you still get a tax deduction for the sales tax. See previous post Tax Deductions: Above-the-Line, Standard, Itemized, and Miscellaneous for the difference between a tax credit and a tax deduction.
The tax credit is called Alternative Motor Vehicle Credit. It’s been available for a few years now. There are four categories of vehicles under the program. For the average consumers, the two most relevant categories are basically hybrid and clean diesel cars. These cars must be purchased new. Leasing does not get you the credit.
Summer Tax Tips From the IRS
The kinder, gentler IRS published 7 sets of tax tips for the summertime this year. Check them out:
IRS Taxing Employer Provided BlackBerry or Cell Phone
Does your employer provide you a BlackBerry or cell phone or pay for your wireless service? Do you use that device for personal purpose too? The IRS is considering three ways to tax you for that.
Certain employee benefits, like health care, are not taxable. Personal use of an employer provided BlackBerry or cell phone is not one of them. The IRS published Notice 2009-46 on June 8. It’s on pages 13-15 in Internal Revenue Bulletin 2009-23. They are asking for public comments about the three methods it’s considering.
1. Minimal Personal Use Method. There are two proposals under this method. Under the first proposal, if the employee can show to the employer that he/she carries another personal cell phone and uses that phone for personal matters, then the employee won’t have to pay taxes on the company provided BlackBerry or cell phone. Under the second proposal, there would be a threshold of say X minutes. If the employee can show he/she used the BlackBerry or cell phone for personal purpose for no more than X minutes or he/she used it only for certain exempted types of calls (emergency for example), the employee won’t have to pay taxes for such personal use.
Bartering and Taxes
While catching up on old news, I heard a story about bartering on the Marketplace Money podcast. It’s called a Time Bank. Basically you do something for someone else and earn some Time Dollars. Then you use your Time Dollars for services you want from another person. It’s an indirect bartering system because direct bartering requires a coincidence of wants. In other words if you are a plumber and you fix a car mechanic’s drain, but you need guitar lessons, not replacing the water pump in your car, you can’t barter directly with the car mechanic, unless the car mechanic also happens to teach how to play a guitar. Time Dollars serve as a medium of exchange.
Bartering is apparently hot these days. The popular web site Consumerist recently quoted an Associated Press article Short on cash? Bartering making a comeback which said traffic to bartering web sites doubled in this weak economy.
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Too Big to Fail by Andrew Ross Sorkin -
