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factors should considered? Can proper planning help a tax payer benefit from
itemizing instead of using standard deduction or vice versa? Explain.
Ans:
The second part of the question needs the taxpayer to consider his/her events in
life and personal expenses. However, unless he has a large amount of qualifying
expenses, it is better taking the standard deduction, as most of the taxpayers
do. Since he can decide every year whether he want to take the standard
deduction or itemized deductions, careful tax planning can help him maximize
his deductions in years he chose to itemize. Taxpayer can benefit from itemized
deductions if he has interest on mortgage, for example. If a taxpayer is planning
to buy a house, he can mortgage it and count this item towards reducing his
taxable income. To maximize his deductions, taxpayer can opt to increase his
interest expenses by buying on interest. In case of medical expenditure,
clustering his deductions can maximize the value and allow him to cross a
minimum threshold, for example, he can cluster any of the regular expenses into
the following year to make 10% of AGI in expenses in one year. That would
make 2.5% of those expenses deductible. The year the taxpayer chose to
itemize his deductions, it make sense to cluster his spending for that year in
deductible categories. It gives him the option to make purchases for any items
he has been holding o in that particular year. If he is, for example, already over
the 7.5 percent medical deduction threshold, it makes sense to consider
medical treatments he has been holding o to maximize the eect.
Response 1:
There is a question as to when one should itemize. One obvious condition what
we have discussed so far is when we believe the total of our itemized deductions
might be larger than the standard deduction that we are eligible for, we should go
ahead with itemizing the deductions. In particular however, people who own
homes should always itemize since there is a high probability that they have
gone through property taxes and real estate interest that be greater than the
standard deduction. If we donate to charity on a constant basis and spend a
Q1.
This article addresses the problem of what to do when your costs regularly fall just
short of the income thresholds they must meet in some deduction categories, and
why individuals should consider alternating between the standard deduction and
itemized deduction. For example, most people can increase their deductions by
bunching two years of charitable donations and paying two years of property
taxes. The next year since your itemized list is reduced, you can take advantage of
standard deduction, which will be more than what you are qualified for otherwise.
Frequently tax planners fail to notice that middle-income families can make use of
this multi-year planning strategy to save modest amount in taxable income. For
joint filers specially, the total of itemized deductions using multi-year planning
easily exceeds the standard deduction, assuming they make two years worth of
donations in a single year prepay the local and state taxes for next year before the
end of the year. So in effect, bunching deductions for multi-year can increase the
itemized deductions for that year significantly, leaving only meager amount of
itemized deduction for next year, in which case the couple can take advantage of
standard deduction. The article addresses both sides of the picture by mentioning
some drawbacks including the hassle (extra time and work) to itemize and missing
out on interest income on the spent money in a single year.
We have learned the components of formula for federal income tax on individual in this
chapter. On pp 3-2, we have Framework 1040 Tax Formula for individuals where
they can deduct the greater of itemized deductions or the standard deduction from
Adjusted gross income, signifying the importance of itemized reductions when
they are greater than standard deduction. The taxpayer can see that itemized
deductions and standard deductions were designed as alternative by IRS so that
with little planning, the taxpayer can save modest amount in his taxable income.
Response 3 :
I believe it is safe bet because insurance expenditures are getting higher, and in that
case individuals would like to take advantage of high deductible health insurance policy
and put the premium savings in something like HSA. The fact its tax-deferred option
makes it reasonable retirement plan. Life expectancy when one reaches sixty-five years
age approximates to about eighty-five years so an average retiree needs to prepare for
a twenty year nest egg with enough savings to cover unexpected health care cost. HSA
also satisfies the quality of investment criteria and safe allocation of asset, as that of
risk aversion because there is tendency of individuals to move from risk tolerance to risk
aversion they reach retirement. Of course, we have to keep in mind that longer life
expectancy is a double edged sword. An an additional point to bear in mind I believe
how secure is your health saving account. Is it FDIC insured or some mutual fund which
is not insured? Do you need to worry if your HSA provider goes out of business?
Assignment #2
Life expectancy when one reaches sixty-five years age approximates to about
eighty-five years so an average retiree needs to prepare for a twenty year nest
egg with enough savings to cover unexpected health care cost. HSA also
satisfies the quality of investment criteria and safe allocation of asset, as that of
risk aversion because there is tendency of individuals to move from risk
tolerance to risk aversion they reach retirement. However, of course, we have to
keep in mind that longer life expectancy is a double edged sword. :) An
additional point to bear in mind I believe is how secure is your health saving
account. Is it FDIC insured or some mutual fund which is not insured? Do you
need to worry if your HSA provider goes out of business?
AMT. Thus, for a taxpayer who pays the AMT (i.e. their AMT is higher
than regular tax), it may be better to itemize deductions, even if it is
less than the standard deduction.
itemize