Question for all of you Tax buffs / investment guys out there.

[GoingUp]

I?m a single guy with no dependants who claims 0 deductions on my taxes. I am working a lot of paid overtime so money is good and I recently bought a home.

Correct me if I?m wrong, but the government taxes you on your refund if you use itemized deductions. Is this assumption correct?

Next year I will be taking itemized deductions for about $10,000 for my property taxes and mortgage interest. Since I am making more, my tax rate is higher too, so I?m sure I?m really overpaying my taxes right now with 0 deductions.

If we assume that I get a $10,000 deduction and 30% tax rate, I should be getting $3000 back. But on my 2007 return I would have to count that $3000 as income and have to pay $900 in taxes on it, assuming a 30% tax rate, so in effect, I only get $2100 back.

I am thinking about claiming 1 or 2 deductions on my taxes to help reduce the big refund I would get because the government is going to take a big chunk out of my ass if I use itemized deductions.

What do you ATOT financial people think of this idea, and am I correct about the government counting my tax refund as income if I use itemized deductions?

 

[crownjules]

Personally, I think it's good to take more withholdings anyway (but not so many as to have to pay the underpaid penalties). Everyone LOVES to see a big fat check at the end of the year. The thing is, if you're responsible with money then you're losing out. That $3000 you're getting back at the end of the year has no interest on it. Whereas if you had gotten in your paychecks gradually throughout the year and placed it into investments, you might be somewhat richer.

 

[kranky]

Originally posted by: Gobadgrs

Correct me if I?m wrong, but the government taxes you on your refund if you use itemized deductions. Is this assumption correct?

No. Itemizing deductions is a factor in determining your taxable income. You pay tax on your taxable income, that's it. You may get a refund if you had more withheld than what you owe, but nothing about your taxes changes if you itemize other than it is a factor in what your taxable income is.

Next year I will be taking itemized deductions for about $10,000 for my property taxes and mortgage interest. Since I am making more, my tax rate is higher too, so I?m sure I?m really overpaying my taxes right now with 0 deductions.

If we assume that I get a $10,000 deduction and 30% tax rate, I should be getting $3000 back. But on my 2007 return I would have to count that $3000 as income and have to pay $900 in taxes on it, assuming a 30% tax rate, so in effect, I only get $2100 back.

I am thinking about claiming 1 or 2 deductions on my taxes to help reduce the big refund I would get because the government is going to take a big chunk out of my ass if I use itemized deductions.

What do you ATOT financial people think of this idea, and am I correct about the government counting my tax refund as income if I use itemized deductions?

Your refund is not taxable, because you already paid taxes on that money when you earned it as income.

A silly example to make the point: you have income of $50,000 a year. You (because you're a crazy person) have all $50,000 withheld for income tax. At the end of the year, you itemize your deductions, determine your taxable income, and you end up owing $4,000 in income tax. You are due a refund of $46,000. Can you see why you won't get taxed on that refund? All that income was already factored into determining what you owed.

 

[GoingUp]

Originally posted by: kranky

Originally posted by: Gobadgrs

Correct me if I?m wrong, but the government taxes you on your refund if you use itemized deductions. Is this assumption correct?

No. Itemizing deductions is a factor in determining your taxable income. You pay tax on your taxable income, that's it. You may get a refund if you had more withheld than what you owe, but nothing about your taxes changes if you itemize other than it is a factor in what your taxable income is.

Next year I will be taking itemized deductions for about $10,000 for my property taxes and mortgage interest. Since I am making more, my tax rate is higher too, so I?m sure I?m really overpaying my taxes right now with 0 deductions.

If we assume that I get a $10,000 deduction and 30% tax rate, I should be getting $3000 back. But on my 2007 return I would have to count that $3000 as income and have to pay $900 in taxes on it, assuming a 30% tax rate, so in effect, I only get $2100 back.

I am thinking about claiming 1 or 2 deductions on my taxes to help reduce the big refund I would get because the government is going to take a big chunk out of my ass if I use itemized deductions.

What do you ATOT financial people think of this idea, and am I correct about the government counting my tax refund as income if I use itemized deductions?

Your refund is not taxable, because you already paid taxes on that money when you earned it as income.

A silly example to make the point: you have income of $50,000 a year. You (because you're a crazy person) have all $50,000 withheld for income tax. At the end of the year, you itemize your deductions, determine your taxable income, and you end up owing $4,000 in income tax. You are due a refund of $46,000. Can you see why you won't get taxed on that refund? All that income was already factored into determining what you owed.

But doesn't it count as income on the next years taxes? I remember my TaxCut software telling me that I dont have to pay any 2005 taxes on my 2004 tax refund that I got in March of 2005 because I didn't itemize the deductions.

 

[dullard]

You are wrong, Gobadgrs - but you aren't too far wrong.

[*]If you itemize deductions, you get to deduct state taxes.
[*]You must fill out the federal tax form first before doing the state tax in most states.
[*]So, how do you deduct the taxes that you haven't calculated yet? There is a problem.
[*]The solution? You deduct whatever was withheld during the year for state taxes - because that is a good estimate.
[*]But that estimate isn't perfect, and the IRS wants perfection to avoid an easy tax loophole.
[*]Thus you estimate your taxes this year, and next year you correct for any errors. If you overpaid state tax in 2006 then you overdeducted federal tax in 2006. Thus in 2007, you correct for overdeducting (meaning you pay a little more tax because you paid too little in 2006).

Did that make any sense?

 

[kranky]

No, it won't count as income. It was already taxed. What TaxCut told you doesn't make any sense. It doesn't matter if you itemized or not, your refund won't be taxed in the following year.

Is it possible you misinterpreted what TaxCut said?

I should clarify that I'm only talking about federal tax refunds. The situation is different for state and local tax refunds. If you itemize, state and local income taxes are deductible. If you itemize $3000 of state and local income taxes, and it turns out that you get a refund of $200, that $200 WILL be taxable in the next year - because you DIDN'T pay tax on that $200 already (you deducted it from your income in the previous year).

 

[GoingUp]

Originally posted by: kranky
No, it won't count as income. It was already taxed. What TaxCut told you doesn't make any sense. It doesn't matter if you itemized or not, your refund won't be taxed in the following year.

Is it possible you misinterpreted what TaxCut said?

I should clarify that I'm only talking about federal tax refunds. The situation is different for state and local tax refunds. If you itemize, state and local income taxes are deductible. If you itemize $3000 of state and local income taxes, and it turns out that you get a refund of $200, that $200 WILL be taxable in the next year - because you DIDN'T pay tax on that $200 already (you deducted it from your income in the previous year).

I'm still confused. I'm not too worried about paying taxes on any state refunds because thats only a couple of hundred bucks. I dont want to be paying big taxes on my big federal refunds. This year I got $2300 back from Federal and I should get even more back next year since I now have a mortgage and am claiming the same amount of 0 deductions on my W2. So basically what youre saying is that if I itemize my deductions, I get taxed on my state refund but not my federal? Is that correct?

 

[tfinch2]

Have you ever gotten a refund before? Did you pay the taxes on it previously? Why would it be any different now that you are itemizing your deductions?

 

[kranky]

Originally posted by: Gobadgrs
So basically what youre saying is that if I itemize my deductions, I get taxed on my state refund but not my federal? Is that correct?

Yes.

 

[dullard]

Originally posted by: Gobadgrs
So basically what youre saying is that if I itemize my deductions, I get taxed on my state refund but not my federal? Is that correct?

That is correct. You are taxed on your state tax refund if you itemize (in most cases).

You are not double taxed in any case. You are not double taxed on your federal return.

 

[dullard]

Just fill in your W-4 properly. There is a worksheet on page 2 of it that lets you include your itemized deductions and have the right amount withheld.

(1) It is financially bad to give the IRS an interest free loan throughout the year.
(2) You can enjoy or invest your hard earned money up to 1.5 years sooner.

Note: since your standard deduction is ~$5000, and your itemized deductions is ~$10,000, you really only net a $5000 deduction from your house. Many first time home owners falsely assume they get the full deduction. Sorry to burst your bubble if you were in that group (I too made that mistake when I first did the calculations, but I quickly realized it).

Note: Since your itimized deduction is not too much greater than your standard deduction, you might want to think about playing with a neat and 100% legal tax loophole. Consider itemizing deductions every OTHER year. Whether this is beneficial to you really depends on the size of your property tax bill (and any non-interest deductions you have)
[*] Double up on expenses one year and itemize that year. Then pay nothing the second year and do the standard deduction that year.
[*] Pay your property taxes in the year as you are supposed to, then pre-pay next year's property tax.
[*] Pay 13 mortgage payments in one year and 11 the next.
[*] Get a large state tax refund one year and pay in the next.
[*] Donate a double amount to charity/church one year and zero the next.
[*] Etc.
[*] Depending on the exact details of your expenses, you may save hundreds/thousands in your tax bill legally.

 

[GoingUp]

Originally posted by: dullard

Originally posted by: Gobadgrs
So basically what youre saying is that if I itemize my deductions, I get taxed on my state refund but not my federal? Is that correct?

That is correct. You are taxed on your state tax refund if you itemize (in most cases).

You are not double taxed in any case. You are not double taxed on your federal return.

Thanks guys. Thats what I was looking for.

 

[zanieladie]

Originally posted by: crownjules
Personally, I think it's good to take more withholdings anyway (but not so many as to have to pay the underpaid penalties). Everyone LOVES to see a big fat check at the end of the year. The thing is, if you're responsible with money then you're losing out. That $3000 you're getting back at the end of the year has no interest on it. Whereas if you had gotten in your paychecks gradually throughout the year and placed it into investments, you might be somewhat richer.

:thumbsup:

The government gets YOUR money interest-free. You'd be better off getting the money throughout the year and investing it.

 

[dartworth]

I usually go married 9 when working lots of overtime on the road...

If the job is just for a week or two...I'll just go flat 50. They just take out $50 in federal taxes...