Update: The $8,000 First Time Home Buyer Tax Credit Extended the deadline until June 30, 2010. In addition, it will now include a $6,500 Home Buyer Tax Credit for Existing Homeowners.

We finally have an enhanced first time home buyer tax credit! The President signed the Economic Stimulus Bill Tuesday, which includes a $8,000 tax credit for first time home buyers.

$8,000 First Time Home Buyer Tax Credit

Even though the $15,000 Home Buyer Tax Credit was proposed, it was cut back in negotiations.

The good news for home buyers, is that unlike last year’s $7,500 First Time Home Buyer Tax Credit, the 2009 home buyer tax credit doesn’t need to be paid back!

Here is additional information on the credit:

  • It applies to homes purchased January 1, 2009 through November 30, 2009.
  • You must keep the home for three years.
  • The credit is for $8,000 or 10% of the home’s value, whichever is less.
  • The credit is refundable.
  • You cannot have owned a home for the past 3 years.
  • It phases out for incomes between $75,000 to $95,000 for single and $150,000 to $170,000 for couples.

How to File for Your Home Buyer Tax Credit

A reader, Yvette, asked the following question:

Since the stimulus package was signed, when and where can I find the details for the $8,000 home buyer tax credit? We are in escrow now hoping to close by the end of this month and are holding off on filing our taxes because we would like to file the house for 2008. Also, do the tax software packages get updated with that info? Or that box for a tax credit?

In the original bill, you could elect to treat the $7,500 loan for a 2009 purchase on your 2008 taxes. According to the new 2009 bill, you can still make the election on your 2008 taxes. If you do this, you still will not have to repay it, if your purchase occurs during 2009.

I checked my version of TaxCut yesterday, but haven’t seen any updates yet. I also haven’t seen any memos from the IRS yet.

In the past, in this type of situation the IRS usually updates the affected forms (Form 5405 is where you claim the credit), and the tax software packages follow soon after. However, we’ll have to wait to see how they decide to handle the increase to $8,000.

Otherwise, if you are really anxious, you could just claim the $7,500 on your taxes, and make an amendment for the other $500 once the forms are available.

Update: For instructions on how to get your tax credit, including the form to file with your taxes and what documentation you need to include, see How to Claim Your Home Buyer Tax Credit.

More Details

You can read the full text of the economic stimulus bill, called the “American Recovery and Reinvestment Act of 2009” on the White House’s site. The $8,000 home buyer tax credit is in section 1006 in the first and second files.

In addition, the President is planning more relief for homeowners and the housing market in the “Making Home Affordable Program.”

It’s tax time! It’s hard to remember everything about taxes, so here is a comprehensive tax guide to get you through tax season! From important tax dates to planning for next year, and just about everything in between, we’ve got you covered!

Tax Numbers

2008 Tax Information. Reference sheet for 2008 tax limits, credits, exemptions, deductions, phase-out and exclusion numbers all in one place.

2009 Tax Dates. Important tax dates to remember in 2009, including due dates and extensions for your 2008 tax return.

Tax Software

TaxCut. TaxCut is my software of choice this year based on cost and features available. More information is available in the 2008 TaxCut Review.

TurboTax. TurboTax is the most popular tax preparation software. While it’s slightly more expensive than TaxCut, it’s the leader in the industry, and comes out on top in this TurboTax comparison.

TaxAct. TaxAct, the alternative to the big two giants, is gaining momentum. I used it last year and was pleased with the software.


6 Free E-File Options. Check out your free e-filing options this year, including descriptions of the following free e-file programs:

Tax Credits

Saver’s Credit for Retirement Contributions. The Saver’s Credit (which used to be called the Retirement Savings Contributions Credit), is a tax credit up to $1,000 ($2,000 if filing jointly). The tax credit is for contributions to 401ks, IRAs, and other retirement plans.

$7,500 First Time Home Buyer Tax Credit. A 15 year 0% interest free loan from the government for first time home buyers in 2008. Just make sure you don’t confuse it with the $8,000 home buyer tax credit, that you don’t have to repay for 2009, included in the economic stimulus plan.

Earned Income Tax Credit. The earned income tax credit (EITC), which is refundable, is intended to help low to moderate income individuals and families and provide an incentive to work.

Midwestern Disaster Area Tax Credits. Tax breaks for those impacted by the storms of 2008, including additional college tax credits and expansion of deductible casualty losses from the storms.

Refundable vs. Non-Refundable Income Tax Credits. What’s the difference and what does it mean for your taxes?

Tax Deductions

Personal Car Mileage Deductions. Using your personal car for company business? Here’s how to take your mileage deduction.

Tax Deduction for Women. If you itemize your deductions and have gotten married or been part of a wedding party this deduction is for you! A charitable tax deduction for donating your wedding attire.

Tax Deductions, A Photo Essay. Ideas for more deductions including home mortgage points, long term care insurance premiums, and IRA administration fees.

Overlooked Tax Deductions. Did you have any of these: jury pay paid to employer, student loan interest paid by your parents, or military reservists travel expenses? Don’t forget to take your deduction!

Filing Requirements

How Much Money Do You Have to Make to File Taxes? Did you make less money last year due to the economy? Find out the income thresholds that require you to file a tax return.

When Do Kids Need to File Taxes? If your children earn interest and dividends from investments or have a part-time job, they may need to file a tax return. Find out when you need to files taxes for kids.

How to Make Estimated Tax Payments. Who needs to make estimated tax payments, how to pay, when to pay and how much to pay.

When Should You Mail Your Return or Have it Postmarked? If the tax filing deadline is April 15 what does that really mean for filing and submitting your return and payment?

Planning for Next Year

17 Tips for Tax Planning. A little planning results in great rewards! Here’s your list of money moves to make before the end of the year sneaks up on you!

9 Tax Changes Affecting Individuals for 2009. Among the changes: required minimum distributions suspended, new energy credits, and even a new bicycle tax credit for commuters!

Tax Tips To Save Money Next Year. These tips can help you make the changes needed today and at the end of the upcoming year to take the bite out of your next tax bill.

2009 Standard Deductions Rise and Changes in Earned Income Credit. Some changes for next year could mean tax savings for you.

Tax Terms

Kiddie Tax. The kiddie tax catches some kids who earn interest and dividends from investments. Find out when the kiddie tax applies and recent changes that expanded the kiddie tax to older children.

IRA Recharacterization. What a recharacterization is, why you might need one, how to complete it and when it’s due.

The Alternative Minimum Tax. What is the AMT? And just how do you avoid it?

Tax Organization

Organize & Prepare: Do Your Taxes Quickly. An easy strategy to take the pain out of doing your taxes. It’s based on some simple organization techniques.

How To Track Tax Receipts When You Itemize. When it’s time to sit down to do your taxes, do you wonder where your receipts have gone? Ideas to better prepare for the tax season.

Tax Discussion

Do You Report All Your Income? An intriguing discussion about why some readers do and don’t report all their income for taxes.

What Would Happen If I Don’t Pay My Taxes? Penalties for tax evasion include the IRS seizing your home, car, other assets, freezing your bank accounts or even sending you to prison. Sound fun?

Will we become a nation of tax cheats? Discussion of a new law that would allow tax payers who are caught in a misstep to pay the tax owed, but without penalty or interest.

Tax Q & A

Have a tax question? Chances are someone else did too! Here are a bunch of tax question and answer sessions:

Taxes and IRAs

Fund a Traditional IRA to Reduce Your Taxes. The traditional IRA is an excellent way to not only to reduce the amount of taxes you owe now, but also to help you save more for retirement.

Roth IRA Limits. Information on the 2009 IRA limits. If you still need to make a contribution for last year, see the 2008 Roth IRA Limits.

Unconventional Roth IRA Strategy to Lower Tax Bill. An unusual tax strategy designed to take advantage of low tax rates.

Economic Stimulus Checks

How the Economic Stimulus Check Affects your 2008 Tax Return. An explanation of what happened (the new tax code eliminated the 10% tax bracket), and how tax software programs handle the stimulus check.

The Recovery Rebate Credit: 2nd Chance at the Economic Stimulus. If you missed out on the economic stimulus check in 2008, and your tax situation has since changed, you may be eligible for this rebate. Typical examples include having a baby or making less income.

Canadian Tax Resources

QuickTax. QuickTax is the tax software of choice in Canada.

9 Ways I Reduced My Canadian Taxes Last Year. Helpful list of tax reductions which can be used for tax planning in 2009.

Canadian Tax Tips. Some thoughts to keep in mind to help optimize your tax return in the new year.

Here’s the 2008 tax limits, credits, exemptions, deductions, phase-out and exclusion numbers all in one place! It is a good reference and will come in handy at tax time. Last year, the list was a popular reference sheet, so I thought it would be good to publish it again.

Exemptions $ 3,500
Standard Deduction
Single $ 5,450
Married Filing Jointly $ 10,900
Married Filing Separately $ 5,450
Head of Household $ 8,000
Dependent $ 900
Standard Deduction Increases
Real Estate Tax Single $ 500
Real Estate Tax Married Filing Jointly $ 1,000
Exemption Phase-out
Single $ 159,950
Head of Household $ 199,950
Married Filing Jointly $ 239,950
Schedule A Phase-out
All except Married Filing Separately $ 159,950
Married Filing Separately $ 79,975
Child Tax Credit $ 1,000
Hope Credit $ 1,800
Lifetime Learning Credit $ 2,000
First Time Home Buyer Credit $ 7,500
Elective Deferrals (401k, 403b, 457, Roth 401k)
Maximum $ 15,500
Catch-up > 50 years old $ 5,000
IRA Contributions (Traditional, Roth)
Maximum $ 5,000
Catch-up 50 and over $ 1,000
Simple IRA Contributions
Maximum $ 10,500
Catch-up 50 and over $ 2,500
Charitable $ 0.14
Business (Jan. 1 – June 30) $ 0.505
Business (July 1 – Dec. 31) $ 0.585
Medical/Moving (Jan. 1 – June 30) $ 0.19
Medical/Moving (July 1 – Dec. 31) $ 0.27
Sale of Residence Exclusion
Single $ 250,000
Married $ 500,000
Self Employment
SE/FICA Maximum Wages for 12.4% $ 102,000
SE/FICA Maximum Wages for 2.9% No Limit
Tax Deduction 50%
Health Insurance Deduction 100%
Earned Income Credit Maximums
No children $ 12,590
1 child $ 33,241
2 or more children $ 37,783
Add if married filing jointly $ 2,000
Estate Tax Exclusion $ 2,000,000
Annual Gift Tax Exclusion $ 12,000
Long Term Capital Gain Holding Period 12 months
Social Security Benefits Tax Maximum 85%
IRC 179 Deduction $ 250,000

Many of the limits above are affected by the Midwestern Disaster areas, including additional exemptions, deductions and credits.

Update: The $15,000 home buyer tax credit was eliminated in the compromised bill. It’s now an $8,000 First Time Home Buyer Tax Credit.

A reader, Keith, left the following comment about the $7500 First Time Home Buyer Tax Credit:

I just read that the $7500 home buyer tax credit is going to be jumping up to $15000. I wish I was buying a house this year!!!

Good catch Keith! The Senate voted yesterday to expand the $900 billion economic stimulus package to include the $15,000 home buyer tax credit. Here are some of the key points of the tax credit.

$15,000 Home Buyer Tax Credit

  • The tax credit is for 10% of the purchase price of a primary residence up to $15,000.
  • It will be for homes bought within one year of the date of the enactment.
  • The tax credit would be available to all home buyers, unlike the $7500 home buyer tax credit, which is only available to first time home buyers.
  • It would not have to be repaid as long as a buyer lives in the house for at least two years.
  • The idea came from a similar successful tax credit in the 1970s.

We’ll have to stay tuned to see what happens next! If you are in the market to buy a house, this could be a terrific help!

TaxCut. I decided. I bought my copy of TaxCut last week. I picked the TaxCut Premium Federal + State + E-file version since I wanted the state software too.

I switched back to TaxCut this year after a brief hiatus using TaxAct last year; I’m happy to be back!

TaxCut Features

Even though the final updates won’t be available until later this month, here’s why I picked TaxCut this year.

Price. $49.95 for the Premium version. The price is cheaper than TurboTax. The most similar version of TurboTax is the Deluxe version for $59.95. (TurboTax also offers a premier version, for $89.95 and a Home & Business version at $99.95). TurboTax originally came out with a pricing structure that had $9.95 fee per additional return. After customers balked, they removed the fee and matched the TaxCut offer of 5 federal E-files for free; but did not match the lower TaxCut price.

Five E-files. With 5 free federal E-files, my mom and I can complete multiple returns, without hitting additional e-filing fees, something that tripped us up last year, using TaxAct. If you only have one return to file, TaxACT is a cheap option at $19.95 (for the version that includes state software). However, at $7.95 per extra E-file, the price jumps to $51.75 for 5 returns.

Deduction Software. It includes DeductionPro, which is helpful to calculate the value of donations. This is something I missed last year!

Physical Disk. I bought the version with a physical disk, because I like to install it on both the desktop and our laptops, so I can work on it whenever I want. If you want the physical version, you may want to purchase TaxCut from Amazon, since they have free shipping. H&R Block also offers the disk version, but charges $5.95 to ship it.

Additional Pros. Here are some more of the features that TaxCut offers. They aren’t what persuaded me, but are nice to haves:

  • WILLPower. It comes with a copy of WILLPower, which we used in past years to complete a simple will.
  • Interview style questions for those not familiar with tax law and error checking.
  • Ask a tax advisor. One session to get an answer to a tax question by phone or e-mail.
  • Audit support.
  • Accuracy guarantee.

TaxCut Cons

Data Import. This is where TaxCut frustrated me. While I have a TaxCut file for many years, I don’t have one from last year since I tried the TaxAct product. TaxCut didn’t support a TaxACT import, but Turbo Tax does. It’s also too bad that you can’t import data from 2007 or earlier. Although it can import data from Microsoft Money, Quicken, and TurboTax.

State E-file Fee. State E-file is an extra fee. While the state software is included, to e-file it is an extra $19.95. I’ll just mail mine in since ours is only a few pages, but if you were planning to e-file, make sure you notice this… it’s in very fine print!

Community Property Business. Schedule C for community property. Just a small annoyance I found, but for those of us in a community property state that can file our joint partnership with a spouse as a single owner on a Schedule C, we have to compute the allocations by hand. I’ve heard that TurboTax includes this option. Although, there are plenty of nice features for business owners, including deprecation assistants for section 179 deductions, a home office adviser, and retirement calculators to determine contributions.

Other Versions

You can pick from the other TaxCut options if you don’t need a state return or need to complete a business return:

  • Basic Federal + E-file: $19.95
  • Premium Federal + E-file: $34.95
  • Home & Business + E-file: $79.95.

In addition, both TaxCut and TurboTax offer online versions. I look at the software versions, since that is what I use.

In addition, you can check out the VITA (Volunteer Income Tax Assistance) program for free tax filing. I’ve volunteered for the program in the past, and it’s a great resource.

While I do have a lot of tax knowledge, most of it from volunteering at VITA, I am by no means an expert!

Every so often, I forward a bunch of questions from readers to our local IRS agent to either answer or confirm my answers. Our contact recently retired after over 3 decades of service, but is willing to still answer questions reader have.


My husband was a co-signer on our daughter’s student loan. We made all the payments towards that loan until we paid it off for her. We claimed the interest that accrued until we paid the loan off, however, the IRS wants the money back. They said since she was not a dependent of ours at the time, they will not allow our deduction.

Since my husband was a co-signer, don’t we have the option to pay it off and receive the benefit of claiming the interest? My husband spoke with someone at the IRS while inquiring about the paperwork to send the payment to them, & she was very surprised that they did not side with us on our appeal. – Cara

Unfortunately, the IRS doesn’t care if your husband was a co-signer. The only way for a parent to deduct student loan interest for a child is if your daughter was a dependent at the time the loan was taken out. The IRS can easily determine that by looking at your tax return the year the loan was taken out.

However, if your daughter made any of the payments, she can deduct any student loan interest payments that she made for her part of the loan. Check out Publication 970 for more information.


Two years ago my father helped me buy a house. He used a home equity loan on his house to purchase my house for me. I was the only one making the payments and it was my primary residence for 2 years.

Now due to financial hardship I have to sell the house. What is going to be the tax liability on the few dollars I will make off the house. Do I have to pay capital gains? We were both listed as the owners on the title. Or since was my primary residence can I get around paying taxes on what I make. – Rudy

Rudy, I’m sorry that you are being forced to sell your house. As long as you owned your home for the full two years (24 months) and used it as your primary residence and you do not make more than a $250,000 gain you will not have to report your share of the gain.

Your father as co-owner will need to report his share of the gain as a capital gain on Schedule D (Form 1040). The exclusion will not apply to him since he was living at another house.


My husband is working overseas for a year as a civilian contractor for a company here in he states on a military base. Do we have to pay taxes on his income that he receives while working overseas? – Debbie

You do not need to pay tax on the foreign earned income if he meets the qualifications. Here are the qualifications from the IRS:

To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned income. Foreign earned income generally is income you receive for services you perform during a period in which you meet both of the following requirements:

  • Your tax home is in a foreign country.
  • You meet either the bona fide residence test or the physical presence test.

You’ll have to determine if you meet the qualifications, because I couldn’t tell from the information that you provided. For more explanation, and how to claim the exclusion see the Foreign Earned Income Exclusion at the IRS website.


On the “First Time buyer” – Loan, it is defined that a first time buyer can not have owned a primary or main residence in the last three years. In 2004 I separated from my wife and I moved out and had a lease on a rental property that became my primary residence.

I still was required to pay the mortgage on the home during the divorce and later ended up losing the house to my ex in the divorce. The house was refinanced without my name and I signed over ownership. Since this was not my residence since 2004 and can prove with utility bills and lease would I qualify for the $7,500.00? – Leo [in Myth Busted: $7,500 First Time Home Buyer Tax Credit is Not a Credit]

Oh my! This is a tough one and an interesting question. Unfortunately, the answer is not spelled out, but “I would go with his name was still on the residence that he lived in previously and he still owned it until it was transferred to his wife.” This one would be contested until spelled out in court cases.

It came to my attention recently that one of the service providers of our family does not report all of his or her income. I’ve always “known about it” in a roundabout way, but it was actually stated to me directly. I’m in a quandary about what to do…. and I’m also mad about it.

The Tax Cheat

I suggested that instead of paying this person, we just set up an automatic transfer from my account regularly, saving me the hassle of writing a check each week. The person told me that they definitely did not want to do that because then there would be a record of the money and they would have to report it. WHAT??!!

I’ve been asking around to see how common it is and it appears that it’s pretty common for this service. So, unfortunately, it isn’t that easy for me to replace this person with another one that will report their income. It actually seems to be a widespread, and very disturbing, problem. I’m guessing that this is common with many industries that pay in tips too.

We Pay Taxes, Why Don’t You?

I’m fuming. Not only at the individual, but at all the people who don’t think that they have to report their income to the IRS. Why on earth would you be entitled to not pay tax, when millions of other Americans have to? I can only assume that my taxes are higher to account for all of those who do not pay their fair share.

When I work, I work my butt off on stuff. We’ve been successful in launching our new company and we reported every single dollar of income. Why? Because it’s the right thing to do. If you choose to live in America where you can earn money you’re obligated to pay tax on that income.

How to Report to the IRS

Do you know someone that is not paying tax? Here are directions on how to rat out tax cheats. Rewards can be up to 30% of recovered unpaid taxes.

I haven’t decided how to handle this issue. Would you report a tax cheat? What about an innocent spouse?

Tell Me Why

I’d love to hear people’s arguments why you think you don’t have to pay taxes on your earned income and I do. I’m not saying that you shouldn’t take advantage of fun tax deductions and other ways to cut down on taxes that are within the law. I’m against under and non reporting of earned income.

I’m also not arguing the tax law here, that is done elsewhere: 66% Of American Corporations Pay Zero Federal Income Tax. I’m more focused on figuring out what the mentality is of people who feel they don’t have to report their income.

Do you report all your income?

(Although, do me a favor and post somewhat anonymously if you are going to tell me that you don’t… I don’t need a bigger problem on my conscience!)

UPDATE: $15,000 Home Buyer Tax Credit possible! Congress passed an $8,000 First Time Home Buyer Tax Credit for 2009. The $7,500 tax credit outlined below will still apply to homes purchased in 2008.

UPDATE 2: The $8,000 First Time Home Buyer Tax Credit Extended the deadline until June 30, 2010. In addition, it will now include a $6,500 Home Buyer Tax Credit for Existing Homeowners.

$7500 Tax Credit. Why are they calling this a tax credit? Have you heard about the new $7500 tax credit for first time home buyers? It’s not a credit at all, it’s a loan! Granted it’s a 0% interest loan, but it’s still a loan. Let’s call it what it is!

$7,500 Interest Free Loan for First Time Home Buyers

A reader that signed up for the Accountants World Daily Newsletter when I suggested the free magazines, sent me the following article: New Tax Credit Can Help Americans Build Long Term Wealth, According to NAHB.

I was skimming it and realized that this is NOT tax credit! Now that we know what it is, let’s look at the details.

What Is It?

It’s a 15 year 0% interest free loan from the government. It’s only called a tax credit because the IRS is handling the distribution of the money. The money will be given to you via a tax credit. You will then repay the loan over the next 15 years through increased taxes.

How Much Is It?

  • You can receive 10% of the purchase price of your home, capped at $7,500.
  • Income phaseouts to qualify for the entire amount are $75,000 for single filers and $150,000 for married filing joint. Partial credits are available up to $95,000 for single and $170,000 for married.
  • It’s refundable, so if your tax liability is less than the credit, you can get the money back.

Who Can Use It?

First time home buyers (a buyer who has not owned a principal residence during the prior 3 year period). For married couples, both of you must be first-time home buyers. The home can also include townhouses, condos, mobile home and houseboats.

How Does It Work?

Purchase your home between April 9, 2008 and before July 1, 2009. (If you build your house, the occupancy date must fall between those dates.) Claim the credit when you file your tax return.

You can claim your First Time Home Buyer Credit on Form 5405. I did a trial entry using TaxCut and it was simple. You just enter your address, date acquired, and purchase price. TaxCut calculates how much of the credit you are eligible for and shows you the payback schedule.

Payback Terms

The credit must be paid back evenly over 15 years ($500 per year for the full amount), beginning 2 years later. If you sell your home before the 15 years are up, you will owe the rest in the year of the sale from the capital gains on the home sale. If there are no gains on the sale, you will not have to repay the rest of the loan.

Special Provision for 2009 Purchases

If your home purchase is in 2009, you can choose to use your income in either 2008 or 2009 to take advantage of whichever year will yield a larger credit. You can also claim it on your 2008 return to get the money sooner.

Should You Use It?

I have no problem with the government giving interest free loans. However, I want everyone to know that is exactly what it is. It is not a tax credit; it is a loan. If you are disciplined and can take the money and put it in a high-yield savings account for 15 years it’s a great source of arbitrage. If you would just spend the money, you may want to skip it and save yourself the trouble.

Article included in Carnival of Personal Finance at BankerGirl.

I’ve been utilizing a tax strategy the last few years to take advantage of low tax rates. Huge deferrals and unpaid maternity leaves gave us some room in the 15% tax bracket to convert traditional IRAs to Roth IRAs, and even 401ks to Roth IRAs. Although we had to recharacterize some of it, we were able to convert quite a bit over the last 10 years.

Planning for High Taxes

I was working on our tax situation during our mid-year review and found that this year we’re going to find ourselves in the opposite situation.

I substantially reduced our retirement savings due to our decreasing contribution plan. In addition, since we’re adding some successful business income we’re going to be hit heavy with taxes. In addition to paying a higher incremental tax, we’ll lose out on our child tax credits and student loan deductions.

Tax Strategy by Income Level

Wouldn’t it be great if some tax strategies existed to smooth out the discrepancy between years? It would look like this:

  • Low tax year: Move tax deferred accounts to after tax/tax free accounts.
  • High tax year: Move after tax/tax free accounts to tax deferred accounts.

The great news is that a tool exists to accomplish the first one: Roth IRA conversions.

Move Tax Free Money to a Tax Deferred Account

I searched all over but couldn’t find a tool to do this for you. So I came up with a new process that I think might work:

  1. Make a tax free Roth IRA withdrawal from contributions and conversions.
  2. Defer the same amount of money plus savings on taxes to a tax deferred account (401k, 457, or 403b). You could also use a traditional IRA if you qualify, but the higher limits may give you more room to play with on an employer sponsored plan.
  3. Use the Roth IRA withdrawal money to replace the reduced amount from your paycheck.


  • Year 1: You contribute $5,000 to a traditional IRA. You also roll over $5,000 from an old 401k plan.
  • Year 2: You contribute $5,000 to your Roth IRA.

Your balances (without earnings or losses) now look like this:
Traditional IRA: $10,000
Roth IRA: $5,000
Total: $15,000

  • Year 3: Your tax bracket is low. You convert $5,000 from the traditional IRA to the Roth IRA at 15%. Tax bill: $750.
  • Year 4: Your tax bill is higher. You withdraw $5,000 from your Roth IRA and contribute $6,666 to your 401k ($5,000 plus the 25% that would have been paid on taxes). Your tax savings: $1666

Notice in year 4 you can only withdraw the $5,000. To withdraw the $10,000 conversion, you must wait 5 years.

Your balances (without earnings or losses) now look like this:
Traditional IRA: $5,000
401k: $6666
Roth IRA: $5,000
less taxes paid: $750
Total: $15916

Net gain: $916

Importance of Tracking Roth IRA contributions and conversions

This process reinforces the importance of tracking Roth IRA money. Once I satisfied the 5 year time period, I unfortunately didn’t keep stellar records of my contributions and conversions. My mom is busy digging out all my old tax returns for the last 10 years to piece it back together.

Action Plan

Because of the need to use a payroll deduction, it’s a good thing I uncovered this one mid-year instead of at the end of the year. I’ll be submitting our changes shortly after I figure out how much I have to work with this year.

Also, see the 2010 Roth 401k and Roth IRA Limits to see how much you can defer in the future.

So what do you think of the plan? The math looks too easy on this one. Tell me what I’m missing!!

In July taxes may be the furthest thing from your mind. In 10 Important Tasks for Your Mid Year Checkup I reminded everyone to assess their tax situation. Here’s a tax question that came up recently. With sky high gas prices, it could be a situation that affects many of you.

Using Your Personal Car for Work

A reader, Kyle, accepted a new job last month. The company requires that Kyle use his personal car for work:

Typically I am driving 200 miles a day and I am reimbursed by the gas price divided by 30 cents per mile plus $400 a month (roughly 23 cents a mile). I see that the IRS acknowledges about 50 cents per mile as cost. Is the roughly 27 cents per mile tax deductible for me next year? – Kyle

IRS Mileage Rates

Mileage Rate Increase in 2008. The first thing Kyle should know is that the IRS raised the mileage rate as of July 1 for the remainder of 2008. The first six months of 2008 will be at 50.5 cents per mile and the last six months of 2008 will be at a 58.5 cents per mile. For anyone computing business mileage, you will need to make two computations – one for each part of the year.

Update: Here are the updated standard business IRS mileage rates for each year since I answered this question:

  • IRS mileage rate 2009: 55 cents per mile.
  • IRS mileage rate 2010: 50 cents per mile.
  • IRS mileage rate 2011: 51 cents per mile through June 30, then 55.5 cents per mile.
  • IRS mileage rate 2012: 55.5 cents per mile.
  • IRS mileage rate 2013: 56.5 cents per mile.
  • IRS mileage rate 2014: 56 cents per mile.
  • IRS mileage rate 2015: 57.5 cents per mile.
  • IRS mileage rate 2016: 54 cents per mile.
  • IRS mileage rate 2017: 53.5 cents per mile.

Deducting Employee Business Mileage

Yes, Kyle can deduct the unreimbursed portion of business mileage (approximately 27 cents per mile in Kyle’s case before the increase). Because Kyle is an employee, the mileage is classified as an employee business expense.

The deductible mileage is only for business travel and does not include commuting miles (from home to your main place of business and return).

How to Report Employee Mileage on Your Taxes

Unfortunately, Kyle can only deduct the mileage if he is itemizing his deductions. If he takes the standard deduction, he’s out of luck. In addition, because employee mileage is a miscellaneous itemized deduction, the deduction is only for any amount above 2% of AGI.

If Kyle plans to itemize and he passes the 2% floor, he can use Form 2106 to calculate the deduction as follows:

Compute the number of business miles multiplied by the IRS standard mileage allowed amount. Subtract the reimbursement you have received from your employer. The remaining amount will carry forward to Line 21 on Schedule A.

You can take your mileage tax deduction when you file online using TurboTax.