The Balanced Spreadsheet-Financial News, Budget Advice, Debt help, Financial Tips, and other advice

January 19, 2010

2010 Tax Changes

Filed under: News Review, Personal Finance — Tags: , , , — thebalancedspreadsheet @ 11:55 am

I know it is only the beginning of January and 99.99% of you have not yet filed your federal income taxes for 2009 (including yours truly).  But it is never too early to start thinking about changes in the tax code affecting your 2010 Federal return.  The IRS has already published their 2010 tax changes.  Some of the bigger changes that stood out to me:

Recapture of $7,500.00 first time home buyer credit-This is NOT the $8,000 credit that began on January 1, 2009 and runs through April 30, 2010, but rather the $7,500 tax credit that was given to first time home buyers in 2008.  The “Credit” is to be re-paid over 15 years in $500 increments starting in 2010.  For those of you who need to repay the loan, you might want to have extra money withheld from your paycheck to cover the $500 extra in taxes you will owe each year.

ROTH IRA income limit-In 2010 the income limit to fully contribute to a ROTH IRA is $120,000 for singles and $177,000 for married filing jointly which is up from $105,000 and $166,000 in 2009.  Also in 2009 there was a phase out amount for singles between $106,000 and $120,000 and married filing jointly between $166,000 and $176,000.

Limits lifted on converting to a ROTH IRA-Starting in 2010, there will be no income limits for those wishing to convert their traditional IRA to a ROTH IRA.  Before 2010 the limit was $100,000.  This is good news for high earners in the past who were ineligible to contribute to a ROTH IRA.  To offset the huge possible tax impact, the money converted maybe be split in half in 2011 and 2012, thus spreading the tax liability over two years. 

Phase out of personal exemption and itemized deductions-For 2009 the phase out starts for those who earn greater then $166,800.  This is another help for high income earners. 

In addition to new 2010 tax laws, a few benefits expired in 2009 and will not be available for 2010.  Some that caught my eye:

Gone are deductions for state and local sales taxes:  If you itemized your deductions you could always choose the greater of your state and local income taxes or your state and local sales tax.  For most people with a state income tax, your income taxes would be greater.  However those states without a state income tax would usually then get to deduct their sales tax.  This will more then likely impact those people in states without state income taxes such as Florida, Texas, and Tennessee among others.

Exclusion from income of up to $2,400 in unemployment compensation-This will impact slightly those who have received extended unemployment benefits due to the recent unemployment spike. 

Those are the ones that I thought would impact the most people.  I would recommend checking out the whole list on the IRS website.  I personally like to know ahead of time changes in the tax code so you can plan accordingly.  As always these changes are always subject to change depending on what ever congress feels like doing on a particular day.  🙂

December 16, 2009

The ROTH 401 (K)

Filed under: Personal Finance, Retirement, Uncategorized — Tags: , , , — thebalancedspreadsheet @ 11:20 am

Last Friday, my employer gave me an early Christmas gift.  They sent out word that starting in 2010 they would be offering a ROTH 401(K) option along with the traditional 401(K) plan! This was very good news as I already contribute to a ROTH IRA and as I have discussed before in comparing traditional and ROTH IRA’s, the tax free growth you get with a ROTH almost always is better then the deferred growth you get with a traditional retirement plan. The differences between a traditional 401(K) and a ROTH 401(K) are very similar to the differences between a traditional and ROTH IRA.

The big difference is still the tax treatment.  Contributions to Traditional 401(K)’s are tax deferred while ROTH 401(K) contributions are made after taxes and have tax free growth.  That means that ROTH 401(K) contributions will result in a higher tax bill in the year you make the contribution compared to a traditional 401(K).  However, under both plans, if the company matches any of the proceeds that amount and its growth is tax deferred.

The one big advantage of the ROTH 401(K) versus the ROTH IRA is the contribution limits.  You can contribute up to $16,500 combined in 401(K)’s in 2009 compared to just $5,000 for IRA’s.  That means you can get up for $11,500 more in tax free growth a year!  There is also no income limit to participate in a ROTH 401(K) while with a ROTH IRA the limit is $105,000 for single filers and $166,000 for married filing jointly.

After crunching the numbers it looks like I will be making the switch from Traditional 401(K) to ROTH 401(K) in 2010.  I will put 9% of my paycheck into the ROTH 401(K).  My employer matches 6%, so that means I will be getting 15% of my net pay into 401(K).  I will stop contributing to my ROTH IRA in 2010.  This will increase my tax bill for 2010 but down the road I will more then make up for it.  The one thing I was worried about in contributing to a ROTH 401(K) was whether or not the tax free contributions would bump me up into the 25% tax bracket in 2010.  However it looks like I will still be in the 15% tax bracket. 

Has anybody else had experiences with a ROTH 401(K)?  Did you like it?  Hate it? Or were you indifferent?  Any feedback is appreciated.

November 25, 2009

The Ohio Marriage Penalty

Filed under: Excel fun, Personal Finance, Real Example, Simulation, Uncategorized — Tags: , , , , — thebalancedspreadsheet @ 11:50 am

With 2009 quickly coming to a close, it is that special time of the year again. No, not Thanksgiving. No, not “Black Friday”, but time for year end tax planning! I know tax planning is not the most exciting thing in the world but I do feel it is important to keep an eye on it to make sure you are legally minimizing your tax bill as I have written before on how much you really pay in taxes.

Since I got married in May I was going ahead and running the numbers for Ohio’s income tax to see what the tax difference is between married filing separately and married filling jointly. I knew that there would be some difference, but I was a little surprised to find out that it will cost us about $460 more to file married instead of separately!

As you can see from the chart here, Ohio’s state income table is the same under any circumstance unlike the federal incomes rates which changes depending on whether you are single, married filing separately, married filing jointly, or head of household. For example that means if you are married filing jointly and you both make $40,000 Spouse #1 pays the same tax as if they were single. However, spouse #2’s $40,000 would get taxed at 4.109% instead of starting at .587% and moving up in $5,000 increment until the final $20,000 gets taxed at 3.521%. Ohio does get a 5% tax credit for filing jointly but does not come close to covering the gap.

Now we could file separately and avoid the marriage penalty. However in Ohio you have to file whatever you file on your federal income taxes and filing separately would make us ineligible to fund ROTH IRA’s for 2009 and the tax free growth of ROTH IRA’s is more valuable then the $460 long term. IT is disappointing though to pay more tax simply because you committed the “sin” of marriage. J

Overall the $460 is not going to change our life either way, but perhaps this why Ohio’s growth rate is among one of the lowest in the nation.

October 15, 2009

Traditional IRA v. ROTH IRA

Filed under: Personal Finance, Retirement, Simulation — Tags: , , , , — thebalancedspreadsheet @ 3:01 pm

With the Dow Jones Industrial Average once again breaking past the 10,000 point plateau yesterday, a lot of talk right now is about investing into the market.  Usually people invest in either a 401(K) through their work or an Individual Retirement Account (IRA).  There are two kinds of IRAs, Traditional IRA and ROTH IRA.  I am going to try and give a brief explanation of each and what I recommend to use. 


While there are some key differences between the two, there are also some similarities.  First, the maximum contributions are the same.  For 2009 you may contribute up to $5,000 ($6,000 is over 50) into either a Traditional or ROTH IRA.  Also, you can start withdrawing from you IRA with no penalty after you turn 59½.


There however are some minor differences. You can only fully contribute to a ROTH IRA if you income is less then $105,000 for single filers and $166,000 for married filing jointly.  But there are no income limits for contributions to a Traditional IRA.  But you do have to start making mandatory withdrawals starting at age 70½ with a Traditional IRA, opposed to no mandatory withdrawals with a ROTH IRA. 

The major difference though between Traditional and ROTH IRA is the different tax treatments each receive.  Traditional IRA contributions are pre-tax, meaning that all contributions and growth will be taxed at the time of withdrawals, while ROTH IRA contributions are after tax, meaning contributions are taxed at your income rate at the time you contribute.  But when you make ROTH IRA withdrawals, both the contributions and growth are tax free!


For our comparison let’s assume you make $50,000 this year and are less than fifty years of age and contribute the $5,000 maximum.  Under a Traditional IRA you would pay Federal income taxes on $45,000 ($50,000-$5,000), while under a ROTH IRA you would pay federal income taxes on $50,000.  So under a Traditional IRA you would have an immediate tax savings.  But over the long term what would the difference be when you are ready to retire? 

If you put $5,000 each year for 30 years into an IRA averaging a conservative 10% annual rate of return you would have ~ $942,000 at the end of the 30 years!  That means you would have $150,000 worth on contributions (30 x $5,000) and ~ $792,000 of growth!  With a ROTH the $792,000 growth would be 100% tax free, while with a Traditional IRA the entire growth would be taxed on when you make withdrawals from you account.  So while you have to pay the taxes on the ROTH IRA initially up front, tax free growth on a ROTH IRA would be a better long term value at retirement then a Traditional IRA because of the tax implication.

Well that is a short and brief explanation of the difference between Traditional and ROTH IRA’s.   Hopefully this answers any questions you might have before making your 2009 contributions.

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