Category Archive

I was playing with Excel a few days ago and made up some charts on where I estimate my salary goes. Here is a rough breakdown: (Dept is Debt, which is my student loan. I am too lazy to fix my typo. :))

Essentials = Rent, Food, Gas, Insurance and Car
Fun = Entertainment, gifts, computer, internet/cable, and travel

The tax portion is a bit inflated, I think. Last year my effective tax rate was only 17% but that was in a state with lower taxes. Then there is sales tax… Well, who knows?

Here are the details as estimated by me, though it gets a little meaningless with all the 1% categories:

I wonder what my chart would have looked like when I lived in the much cheaper area in the Midwest. My salary was lower, but my rent was only 12% or 13% of my salary. Did I save more, or just spend more on non-essentials? Probably a little bit of each. When T and I get a place together (maybe in a year) the rent percentage will drop to a level I’m more comfortable with (maybe 17%), and maybe the savings level will increase.

I was pretty excited because my economic stimulus check was to be direct deposited very early in the schedule. In fact, not to brag, but I was scheduled to be one of the first people in the country to get my share! I filed early and got my refund direct deposited, and managed to procure a SSN with the last 2 digits lower than most other people. I rule, I thought.

Then I came across this little tidbit of information on the (surprisingly helpful) IRS website:

I used Direct Deposit to split my refund betweeen several accounts when I filed my tax return. What will happen to my Stimulus Payment? Will it go to just one of the accounts?
A. If you elected to split your refund between several accounts, you will not receive your Stimulus Payment by Direct Deposit. Instead, you will receive a paper check.

Yes, it is true. I split my payment into two accounts to save myself having to transfer the appropriate portion to checking and savings. I am surprised that the government wouldn’t just put it in either account, but I suppose there is some logic to it. They aren’t sure where I want it, so they will send me a check and I can decide. Now I’m sad, I’ll have to wait an additional two weeks, and a few more days to get it into the appropriate accounts. I might as well have a SSN of 999-99-9999. I guess I don’t rule after all. (Also the three e’s in betweeen are copied from the website.)

In other financial news, my scarcely used Wells Fargo credit card (and by scarcely, I mean I might have used it once last year) tried to charge me $24 to be enrolled in their rewards program. I got the charge removed, but they warned me “all current rewards are forfeited”. I wasn’t too upset about that.

I was clicking along through TaxAct, and it asked if I’d made any contribution to an Health Savings Account (HSA) this year. It instructed me not to include employer contributions or contributions made by my employer through a cafeteria plan. I thought, “why yes, I did make contributions. My salary was reduced by $1500 this year, and it went into my account.” Cafeteria plan? I pictured my workplace cafeteria, and wondered how they were involve in health care. I never ate there, so that probably didn’t apply to me.

Uh….

I later noticed that my $1500 was double counted as a deduction. I looked up “cafeteria plan” and realized that was exactly what my HSA was funded through! Ooops. I had selected my benefits from a “menu” of choices, thus it was a cafeteria plan. Ohhhh, I see! Why don’t they just say what they meant?!? I corrected it, and my refund fell by several hundred dollars. Still, I haven’t received any tax information from my HSA administrator, so I suppose I should wait to file until I get that. Which doesn’t make sense to me, because those distributions were tax free anyway. Why would I even need to report them?

To be honest, I’m not certain I filed my 2006 taxes right with regards to my HSA. I got a lonely form that looked suspiciously like a tax document sometime in March, long after I filed my taxes. I do know that I paid the right amount: Money taken from the account is tax free and my contributions were pre-tax. Simple. I just don’t know if I documented it right.

Also, I moved to California this January and I obviously entered my current address on my tax return. TaxAct helpfully assumed I would need a CA state return in addition to my Iowa one. I had to click through the entire California state return for it to figure out that I didn’t owe any taxes here for 2007, nor do I have to file a return.

Well anyway, I’ll hold off a week on officially filing them, and if nothing shows up from my HSA, I’ll give them a call.

Projected refund is about $1000 total. I owe the state $200 and the federal government owes me $1200. Oh sure I’m giving the government a tax free loan, blah blah blah. Assuming a 5% return in my savings (which isn’t likely these days) I missed out on $50 of interest, which would have been taxed anyway…. And now I have $1000 that I did not spend and can use to replenish the e-fund. It is already back to about $8500, so another thousand will boost it quite close to the 10k goal.

While filing my taxes using TaxAct, I clicked on a pop-up that gave me tax tips for 2008. One interesting suggestion that had was to own a home.

A Real Tax Shelter
Purchasing a home is one of the best tax shelters available. The interest and points that you pay for the purchase are deductible as itemized deductions. The property taxes that you pay on the home are also deductible as itemized deductions. Best of all, when you sell the home, you probably will not need to pay any tax at all on the gain. There is no other investment that can provide the tax advantages like home ownership.

Though it was a friendly little tip, it got me thinking and got me a little mad. Why is does owning a home provide such great tax benefits? (Deductions for dependents is another story…. But raising kids is ridiculously expensive so this doesn’t bother me much.) Is it fair? If so, why is it fair? Do most developed countries do this? Where did this idea come from? Of course, popular belief is that the main reason is to encourage people to own homes. It is the American Dream. But why? Why does the government want to encourage home ownership for everyone? Why am I seen less favorably because I’m priced out and relatively uninterested in locking myself to a property?

How about another viewpoint? The New York Times says that is simply a nice “American folk legend: the government invented the mortgage-interest deduction to help people buy their own homes, and the level of homeownership has risen ever since.” The real story, they claim, is much less middle class friendly. It stems from the government originally having all interest as deductible, which was really intended to help business. The average American didn’t have a mortgage (or credit card) and wasn’t paying interest in the first place (can you believe that!), so interest was a business expense and therefore deductible. Later this broad rule was changed, for obvious reasons, but the mortgage interest stayed (for less obvious reasons.) Further, the author claims tax is actually regressive with “the rewards are greatly skewed in favor of the moderately to the conspicuously rich.” Wow. This is stuff I’d never heard of before. I will stop myself from regurgitating the whole article, but it is a great read!

So, how much of an impact does this really make on me anyway? I assume if you own property, you must itemize deductions. I generally take the standard deduction. What kind of itemized deduction would someone on my salary with property get, assuming my rent is equal to their housing expenses? It would be an interesting exercise. The more expensive the house, the bigger the difference.

Ho much impact does it make on the government? A lot, actually: “The mortgage-interest deduction. We all love the deduction for home-mortgage interest. But renters and those who own their homes free and clear get nothing. Cost to the government: $402.7 billion.” That number is from 2006.

If most people are deducting mortgage interest, why can’t I deduct anything for my rent? There is interest and taxes built into the price of my apartment. Is someone else taking those deductions for me? Actually, a few states do allow a small tax break for renters, based on the fact that we indirectly are paying someone else’s property taxes. In California, it is only for senior citizens with low incomes. Yet you can deduct interest on mortgages values over $1 million.

What can a renter do? This article suggests deducting student loan interest (which saved me a couple hundred this year) or a hybrid car deduction (can’t afford a hybrid). For some reason, I don’t feel like that evens things out at all. Apparently all I can do is write my congressman or buy a house.

What do you think? And is your view skewed by the fact that you either do or do not own property? Is it possible that eliminating this deduction could actually benefit the majority of people?