THE TAX ATTIC with Jerry Coon—April 28, 2011

Start thinking about your 2011 tax return

Jerry Coon

I started reading Rob Bell’s new book, “Love Wins,” over the weekend. It’s a very interesting book. Bell has some interesting thoughts on heaven and hell. I’m sure there will be many rebuttals, because he sure has gotten a lot of people thinking about how God interacts with each of us at the end of this short life. That seems to be particularly important in light of the Easter holiday that we just celebrated.

Jesus died on Good Friday and then arose on Easter expressly for the forgiveness of each of our sins. Traditional Christian teaching says our sins will be forgiven only if we ask for that forgiveness and believe they are forgiven through Jesus’ death and resurrection and that’s how we end up going to heaven. No ask, no believe, no heaven. It is a very straightforward teaching. Hell is the alternative, and it’s either heaven or hell forever based on whether we ask for forgiveness in this short lifetime. I wouldn’t say Rob Bell questions that teaching in its entirety but he certainly does bring up some interesting points about God’s love for all people.

A point he makes, and I’m roughly paraphrasing here, is that God does love all people and does want all of them to spend forever in heaven with Him. Since all things are possible for God, does He find a way for them to ask and believe that is beyond our ability to understand and perhaps even beyond the grave? Hmm. Now that’s a real question to ponder, isn’t it? No ask, no believe, no heaven is tough. I don’t think Rob Bell has an answer to that question any more than I do, but it is definitely something to think and talk about.

Taxes are another topic that we should be thinking and talking about all year long. Right now is the perfect time to think about the 2011 tax return while the 2010 tax return is still fresh in your mind. What are the tax breaks that will affect, either positively or negatively, your 2011 tax return? What are the income events that will affect the 2011 tax return? Will some property be sold that creates some capital gains tax? Is 2011 the year to convert a Traditional IRA to a Roth IRA? What will that 2011 tax return look like? Will there be a refund or a balance due? If there is a balance due, what can be done to turn that balance due into a refund? I don’t know too many people who enjoy writing a check to the IRS in April. Now is the time to find out how to fix that problem and make it go away, if possible.

A common event we see that dramatically negatively affects a tax return occurs when a child turns 17. In that year, the $1,000 child tax credit is eliminated. Do you have a 16-year-old who will turn 17 by December 31, 2011 that will reduce your refund by $1,000? A key question is this: Was your refund less than $1,000 this year? If it was, without changing something, you will have a balance due on next year’s return—not necessarily good.

Another huge negative event is the loss of a job and the replacement of some of that income with unemployment. There was withholding on the job income but many taxpayers, for cash flow reasons, choose to not have withholding on their unemployment. This could result in a balance due at the end of the year because unemployment benefits still create 100% taxable income to both the federal government and the State of Michigan. We advise most taxpayers to have withholding taken from their unemployment check.

Another event that is affecting many taxpayers today is the loss of a home through foreclosure, repossession or a short sale. The loss of the home, in most instances, doesn’t create taxable income, but by not having the home, deductions on the tax return are lost. For example, taxpayers have a home with a $150,000 mortgage, so their interest deduction was about $9,000 and their real estate property taxes were $3,000. They lose the home and are now renting for $800 per month. It’s true that they no longer have to pay the mortgage or the property tax, so they are saving those dollars. However, since rent is not deductible on the federal tax return, it’s also true they just lost $12,000 of deductions and probably a nice homestead property tax credit on their Michigan return.

These taxpayers should do some tax planning to make sure they don’t have a balance due on their coming tax return. Of course, this same couple could have one of those events that most positively impacts their 2011 tax return—a birth in the family. That will add $1,000 in child tax credit to their refund and creates an extra exemption amount of $3,650.

In addition to the birth of a child, there are other positive events that will increase a refund. Next week, I will bring up a few of them. Just like with Mr. Bell’s book, it never hurts to discuss these items. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns Action Tax Service
on Northland Drive in Rockford. Contact Jerry at www.actionservice.com.


 

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