A donut-hole in Tax Deductions/earnings?

[ERD50]

Thought I was seeing things. I am on the final leg of my tax inputs, my tax situation should not really be that complex: wife's part-year income, my investments (simple stuff) & dividends/interest, the usual itemized deductions, plus kids college credit/deductions, and a small Roth conversion. The only thing a little funny with all those credits is, my income gets me into the 15% marginal bracket, but the credits almost completely wipe out my taxes, so instead of a gentle slope up from near zero, I hit a 15% slope immediately. OK. This is what I found:

I was trying to figure out if I should go through the work of adding up the "Good Will" type clothing and used goods donations we did this year. It's a fair amount of work to do it properly, so before I started I wanted to make sure that my deductions were not limited or anything.

OK, so I look at Schedule A, and I look at the worksheet and no limitations. Great - should be "golden". Well, I'm dreading documenting all this, so I first make a rough stab at just increasing our charitable donations by $100 to double-check what happens to my tax due/refund. Nothing. Hmmmm?

More digging, and I finally find a very circular string of events that I have not completely nailed down yet, but here are the basics. $100 greater deduction does reduce my intermediate tax calculation by $15. Good so far. But why no change to the final number? I see a Recovery Rebate Credit line item that increased by $15, offsetting the reduction 1:1. What? Well, that leads to a long string of inter-related calculations that I would require me to draw a flow chart to understand how they interact. Something to do with the Child credit, income limitations, $300 per child that contributed to the child credit, some magic number for your filing status, throw in a bag with a chicken bone and shake....

But the bottom line, is between some range of numbers, any change in my taxable income/deductions/credits seems to be gobbled up by the RRC. Does that seem right?

I'm guessing I could have taken another $2,000 in Roth conversion with zero tax liability, but I'm too bleary eyed and tired to figure that out right now. I suspect that other things would come into play to interact with that also. It's these interactions that are the killer - it is really tough to understand what is going on.

Arghhhhh. Anyone have a plain English explanation of this RRC?


Did I mention TAX REVOLT in another thread? I tell you, I am getting fed up with this.

-ERD50

[deepc]

Your first stop should be here: Recovery Rebate Credit Information Center

Depending on your situation, seems you're doing alright if you can find enough deductions to itemize, yet still come out in the 15 pct tax bracket.

[LOL!]

It's a little late for tax planning for 2008. We always do a prelim run of our taxes over the Thanksgiving weekend so that we can make changes in our paychecks, withholdings, FSA, charitable donations, tax-loss harvesting, conversions, etc BEFORE December 31st. I know that's not what you wanted to read, but it's a necessity and don't forget next Thanksgiving.

[ERD50]

Quote:

Originally Posted by LOL! It's a little late for tax planning for 2008. We always do a prelim run of our taxes over the Thanksgiving weekend so that we can make changes in our paychecks, withholdings, FSA, charitable donations, tax-loss harvesting, conversions, etc BEFORE December 31st. I know that's not what you wanted to read, but it's a necessity and don't forget next Thanksgiving.

You're misunderstanding my point.

I am fully aware that I can't do tax planning for 2008 now. But I can decide if it is worth it to bother filling out the forms and document certain transactions that I made in 2008. If my deductions are limited anyway, why bother? I am pretty certain that it is legal to give away clothes and *not* claim the deduction.

However, I can still be grumpy about your point. The fact is, I can't really plan to the level of detail I want before Dec 31st. Why? The congress-critters wait too long to finalize the tax laws so that the tax software companies can get a final product in my hand before the end of the tax year. Here's the email I got from TaxAct - check the date:

Quote:

Subject: Available Now: Your TaxACT Online 2008 Final Version Date: January 8, 2009 3:20:33 PM CST

I do a rough cut as much as I can, but then there are the wrenches in the works. It torques me off.

I posted last year about this - the preliminary version of TaxAct was a total jumble, because Congress had not decided if the AMT would be unchanged from the original law, would the adjusted level from 2007 be used, or would *that* be adjusted for 2008.

Here we go:

http://www.early-retirement.org/foru...eem-41116.html

So, I was already working on my taxes prior to Dec 10th, and had done a fair amount of work all year long, including tax loss harvesting. But the devil is in the details.

-ERD50

[ERD50]

Quote:

Originally Posted by deepc Your first stop should be here: Recovery Rebate Credit Information Center Depending on your situation, seems you're doing alright if you can find enough deductions to itemize, yet still come out in the 15 pct tax bracket.

Thanks, but that just kind of re-hashes the mechanics. I can add, subtract, multiply and fill in line items and follow directions. It's not getting the answer that I'm having trouble with, it's trying to understand *how* this affects the bottom line and interacts with AGI, deductions, credits, etc.

I'm running out of steam though, but it looks like I would need to flow chart it out to get it through my head. I'm sure it's not rocket science, but by the time I get to the fifth "enter the amount in line 22, compare that with line 12b, enter the largest number in line 13, subtract $X depending on your filing status...." I just lose what the point of the thing is.

This probably changes for next year anyhow. So much for "Tax Planning".

-ERD50

[FIRE'd@51]

I think what may be happening is that you didn't use up all of the RRC that you were entitled to with your 2007 tax liability. Thus you have this leftover RRC which keeps offsetting your additional tax liability for 2008 as you increment your income.

Here is a simplified example. Say a husband and wife filing jointly were eligible for a $1200 RRC ($600 per person), but their 2007 tax liability was $700, so they got a rebate check for $700 last year. I believe the way it works is that $500 is left over as a tax credit for 2008. Now, let's say their 2008 tax liability is $300. They will then get a credit of $300 toward their 2008 tax bill and still have $200 of the RRC left over. They discover they actually have some more taxable income, which when entered into the tax software raises their 2008 tax liability by $200. Now the final $200 of the unused RRC kicks in and offsets that, so their tax owed remains at zero. Now if they discover some more incremental income, the expected tax will be owed.

Could something like this be going on? A check would be to see if your actual 2007 tax liability was large enough to use up your entire RRC. If not, you would have received a rebate check for the amount of tax you actually paid and still have a deferred rebate available to apply against your 2008 tax liability.

This is how it basically works, I think.

[ERD50]

Quote:

Originally Posted by FIRE'd@51 Could something like this be going on? A check would be to see if your actual 2007 tax liability was large enough to use up your entire RRC. If not, you would have received a rebate check for the amount of tax you actually paid and still have a deferred rebate available to apply against your 2008 tax liability. This is how it basically works, I think.

Thanks, that might get me on the right path. My tax situation in 2007 was a mess. I inadvertently let a low cost basis stock get called from me (I meant to buy the call back).

That one transaction made me appear to be so "rich", I would have sworn I wouldn't have to pay any taxes at all!

So yes, it appears that I only got a part of the RRC in a check, and the remainder is carried over to this line? Well, I need to dig more to comprehend exactly how it works, or just hit submit. Too late to change anything, just trying to understand.

-ERD50

[FIRE'd@51]

Quote:

Originally Posted by ERD50 My tax situation in 2007 was a mess. I inadvertently let a low cost basis stock get called from me (I meant to buy the call back).

You don't have to deliver the actual shares you wrote the call against if you are assigned. You can buy additional shares in the market and tell the broker to deliver those. You could actually end up with a short-term loss by doing this.

[ERD50]

Quote:

Originally Posted by FIRE'd@51 You don't have to deliver the actual shares you wrote the call against if you are assigned. You can buy additional shares in the market and tell the broker to deliver those. You could actually end up with a short-term loss by doing this.

Hmmmm, very interesting. I will call my broker and discuss this, in case it ever happens again (it shouldn't, but you can get called out unexpectedly).

Thanks - ERD50