Updated: 10/29/2010 9:00 AM ET|
6 tax myths that can cost you money
Your age is irrelevant, and you can take the gain exclusion every two years if you qualify. By the same token, if your property appreciates by $250,000 to $500,000 every two years, give me a call. I could use your help in finding a new house.
Myth 4: I had to buy my first house to be a first-time homebuyer
Surprise! You don't have to be a first-time homeowner to get the first-time homebuyer credit of up to $8,000. You qualify if neither you nor your spouse had an interest in a principal residence for the three years prior to closing on the new house (which had to happen before September 2010).
Alternatively, you may qualify for a credit up to $6,500 if you owned and used a home as a principal residence for at least five consecutive years out of the eight year period ending on the date of the purchase of the new home.
Both qualify as "first-time homebuyers."
Myth 5: I can deduct my sales taxes
This one was once up there with the Loch Ness monster, but the deduction has made a comeback of sorts.
Starting in 2004 and renewed through the 2009 tax year (Congress is expected to extend this through 2010 but has not yet done so as of the date of this update), you can deduct either your personal sales taxes or your state income taxes from your federal income return, but not both. In those states with an income tax, you're far more likely to pay more in income tax than sales tax, so the sales tax deduction remains a rare sighting. But if you live in one of the seven states without its own income tax -- Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming -- congratulations. You get a nice deduction.
Don't get too chummy with this break if you live in one of those states, though. Congress likely will renew the deduction, but that action could get hung up in political fights.
Now, what about sales taxes paid on purchases made in the course of business? Easy: If you pay sales tax on an item bought for business and if the item itself would be allowed as a business deduction, then the sales tax on that item would be allowed as well -- no matter what.
Myth 6: I'm married, so I have to file a joint return
Again, not true. If you're married, you can always file "married filing separately." That normally results in you having to pay more in taxes. But in some situations, it can be to your advantage.
For example, if one spouse has substantial medical or miscellaneous deductions, those deductions are subject to the 7.5% and 2% floors, respectively. That is, only medical expenses above 7.5% of adjusted gross income and miscellaneous deductions of more than 2% of adjusted gross income are deductible. If I had $10,000 in income and my spouse had $90,000 in income, and we filed jointly, the first $7,500 in medical expenses and the first $2,000 in miscellaneous expenses aren't allowed.
But if I filed as "married filing separately," the disallowance would apply only to the first $750 in medical expenses and the first $200 in miscellaneous itemized expenses. The potential availability of $8,550 ($7,500 plus $2,000, less the sum of $750 and $200) in additional deductions could offset the bracket and other limitations of filing separately.
Try it both ways to see which gives you the lower total tax. You can change your filing status annually.
I should add a caveat on this filing myth: If you're married, you normally can't file as single or head of household. Let's say, though, that you're married but separated, and you have a child. There's a special rule that will let you file as a head of household.
You can qualify as an "abandoned spouse" if your spouse didn't live with you for the last six months of the year and you have a child living with you who qualifies as your dependent. If so, you can file as head of household rather than jointly or married filing separately.
Run the numbers to see which produces the lowest tax bill.
Our tax code is complicated and changes with painful regularity. Many of the old rules are poorly remembered and distorted into myths. Don't get caught in the trap of using the wrong rules. That can cost you big.
Jeff Schnepper is the author of the best-selling book "How to Pay Zero Taxes," which is in its 30th edition. He is a former professor of taxation, accounting and finance. Schnepper now has a full-time tax planning and legal practice in Cherry Hill, N.J. Click here to find Schnepper's most recent articles.
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