2005 Federal Income Tax Analysis
Over the weekend I finished my 2005 federal income taxes. This was the most complex return for me due in part to the mid-year conversion of my house to a rental property.
Background Work
Prior to finishing my 2005 taxes this weekend, I had started some work to get to this point:
-I had purchased Taxcut for $8.96 after rebates to help me with this year's taxes.
-At the end of 2005 I reserved $3,000 of my net worth as tax liability because after I quick analysis I thought I would owe a significant amount in taxes. Now that all the dust has settled this turned out to be significantly off; I am filing for refunds on both my state and federal taxes.
Where It Went
Here is a breakdown report from Taxcut of where my money went:
I am surprised that such a high percentage of my income went to federal taxes (16%). If I recall correctly I only paid about 12% in federal income taxes for 2004. I had assumed I would pay roughly the same percentage for my 2005 taxes.
Breakdown of My 2005 Tax Return
Retirement Accounts
I maxed out my 2005 401(k) contributions and maxed out my 2005 IRA contributions in a Roth IRA.
Capital Gains
I maxed out the capital gain losses mostly as a result from carryover losses from stock sales made a couple years ago.
Interest & Dividends
As detailed earlier, I increased my interest and dividend income in 2005.
Primary Residence Conversion
I had to do calculations to determine what mortgage interest and property taxes I could deduct for the early part of year in which I treated my house as a primary residence.
Rental Property
By far the most laborious part of my return, I had to calculate and document many items for the rental activity:
-cost basis for rental property used in rental activity
-cost basis for items used in the rental including the w/d, refrigerator, etc
-cost basis for bathroom remodel project
-insurance premiums including the % from 2004's premiums and the % from the premiums paid in 2005. This included dwelling and liability insurance.
-amount of mortgage interest and property taxes paid for the house after it was converted to a rental property
-utilities between when the house was converted to a rental property and when it was occupied
-cleaning and maintenance expenses including cleaning supplies, materials used for maintenance,
-standard mileage deduction, luckily I started using a log book to record my trips related to the rental activity so this was pretty easy
Tax Reduction Strategies for 2006
I don't really have any well defined strategies other than hopeful plans to purchase a new primary residence. If I buy a primary residence, the mortgage interest and property taxes will both help reduce my taxable income for the year. However, I haven't yet found the right opportunity for me. After going through my 2005 tax return, I can honestly say I really hope an opportunity presents itself in the near future.
Benchmarking with Fellow Personal Finance Blogger's Tax Returns:
Jane Dough paid about 12% in federal income tax.
Five Cent Nickel only paid about 3% in federal income tax (WOW!).
Madame X paid $11,624 in federal income taxes.
Update: Financial Freedumb paid 17.3% in federal income tax.
Update: Flexo paid 10.9% in federal income tax.
Background Work
Prior to finishing my 2005 taxes this weekend, I had started some work to get to this point:
-I had purchased Taxcut for $8.96 after rebates to help me with this year's taxes.
-At the end of 2005 I reserved $3,000 of my net worth as tax liability because after I quick analysis I thought I would owe a significant amount in taxes. Now that all the dust has settled this turned out to be significantly off; I am filing for refunds on both my state and federal taxes.
Where It Went
Here is a breakdown report from Taxcut of where my money went:
I am surprised that such a high percentage of my income went to federal taxes (16%). If I recall correctly I only paid about 12% in federal income taxes for 2004. I had assumed I would pay roughly the same percentage for my 2005 taxes.
Breakdown of My 2005 Tax Return
Retirement Accounts
I maxed out my 2005 401(k) contributions and maxed out my 2005 IRA contributions in a Roth IRA.
Capital Gains
I maxed out the capital gain losses mostly as a result from carryover losses from stock sales made a couple years ago.
Interest & Dividends
As detailed earlier, I increased my interest and dividend income in 2005.
Primary Residence Conversion
I had to do calculations to determine what mortgage interest and property taxes I could deduct for the early part of year in which I treated my house as a primary residence.
Rental Property
By far the most laborious part of my return, I had to calculate and document many items for the rental activity:
-cost basis for rental property used in rental activity
-cost basis for items used in the rental including the w/d, refrigerator, etc
-cost basis for bathroom remodel project
-insurance premiums including the % from 2004's premiums and the % from the premiums paid in 2005. This included dwelling and liability insurance.
-amount of mortgage interest and property taxes paid for the house after it was converted to a rental property
-utilities between when the house was converted to a rental property and when it was occupied
-cleaning and maintenance expenses including cleaning supplies, materials used for maintenance,
-standard mileage deduction, luckily I started using a log book to record my trips related to the rental activity so this was pretty easy
Tax Reduction Strategies for 2006
I don't really have any well defined strategies other than hopeful plans to purchase a new primary residence. If I buy a primary residence, the mortgage interest and property taxes will both help reduce my taxable income for the year. However, I haven't yet found the right opportunity for me. After going through my 2005 tax return, I can honestly say I really hope an opportunity presents itself in the near future.
Benchmarking with Fellow Personal Finance Blogger's Tax Returns:
Jane Dough paid about 12% in federal income tax.
Five Cent Nickel only paid about 3% in federal income tax (WOW!).
Madame X paid $11,624 in federal income taxes.
Update: Financial Freedumb paid 17.3% in federal income tax.
Update: Flexo paid 10.9% in federal income tax.
posted by 2million at
4/10/2006 09:10:00 AM
9 Comments:
That's not that bad...I paid 17.3% Fed...6.7% State...I need to reduce my taxes...:/
By
freedumb, at 5:45 PM
Ha, try:
$110,000 fed taxes
$30,000 state
The only consolation I have is that it would be more in most other countries.
And I still have potholes in the roads, failing schools and a pack of morons "running" the country (for lack of a better word).
By
Anonymous, at 8:16 PM
How can I contact the admin of this blog? I want to share some important information.
Regards,
Robin (robin@mortgagefit.com)
By
Anonymous, at 12:45 AM
Robin,
I can be reached at 2millionblog@gmail.com
By
2million, at 1:46 PM
No I deduct my mortgage interest and taxes as a primary residence personal deduction and then converted it to a rental property after I moved out.
I doubt you can rent it to yourself, but it sounds like a good idea. The advantage would be you could depricate the building and personal property, deduct the repairs, etc that you couldn't do otherwise.
By
2million, at 10:50 PM
Hi $2M,
We finished our taxes in March - new family tradition to get them done early.
I read your posting about tax % and decided to check mine:
fed is 16.17%
state is 4.92%
But you know how it is in NC.
Actually dollar amounts were pretty high, but I'll discuss it a bit in my next posting at.
Regards to everyone,
makingourway
By
makingourway, at 1:51 AM
Interesting - you paid a lower percentage in NC state income tax than I. Any tips? :-)
By
2million, at 9:42 AM
I managed 10.9% in federal taxes for 2005. That's about in line with the last few years.
By
Anonymous, at 1:56 PM
Have a bunch of kids... Nothing beats that child tax credit!
By
Anonymous, at 11:53 PM
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