“It’s Deductible”

People will chase tax deductions or preferences, even when it isn’t in their best interest. The value of deducibility of expenses or donations declines as the marginal tax rate declines.

I might make a tax preparer’s head explode when they see how I do my taxes, becuase I choose not to take advantage of tax deductions that I am allowed. Because I am a thousand dollars or so over the limit for being able to itemize, but Colorado requires me to add back what I deducted for state income tax on my federal return to my “Colorado income” for the purpose of calculating my state income tax due if I itemize deductions, it turns out to be a wash not to itemize. The $300 or so that I would pay in “extra” state tax if I itemized would be exactly offset by my federal tax savings for itemizing, so why fill out an extra form? A further benefit of not itemizing is that any state tax refund that I receive does not have to be declared as income the following tax year.

Lots of people confuse tax deductions with tax credits. Donating to charity “saves” me 32.62% of the amount of the donation if I itemize, and I should be more diligent about tracking charitable donations, considering the seemingly endless food drives that are held at work. Even there, I run into the $500 limit on non-cash deductions. I’d prefer to buy a case of tuna (or some other high-demand item) for the local food bank, but I can usually buy it a lot cheaper than the price that they want to charge me for the convenience, and often sufficiently cheaply that the tax benefit of direct donation is wiped out. The food bank should prefer getting 25 cans of tuna at $0.65 each to $25 in cash from me when they are charging $1.50 per can for tuna donations.

Many people ignore the standard deduction. I call it the “house minimum”, because that and your personal exemption gives you the amount of money that is protected from federal income tax regardless of whatever decisions that you make. I’ve had a bunch of people whose returns that I’ve prepared be frustrated that charitable donations that they made saved them NOTHING on their tax bill because they could not accumulate enough deductions to overcome the standard deduction.

2 thoughts on ““It’s Deductible””

  1. In the Bible Saint Paul wrote: ‘for the love of money is the root of all evil’. He also wrote, elsewhere in the Bible: ‘for their stomachs are their god, and their end is destruction’. I think that is the reason that people fixate on to deductions. They are at heart idol worshipers! It is the underlying reason that the world is all screwed up!

    1. I believe that making a decision purely because “It’s deductible” is stupid, if only because deductions are not worth what they once were in terms of tax reduction because tax rates are lower than they were 30-35 years ago. When I bought my first house in 1988, I had a 15-year mortgage and a 10.5% interest rate. I was better off to make extra payments and avoid paying interest rather than get back about a quarter of what I paid in interest as tax relief. I paid off the house in 1993, which I rolled into another house in 2001 and into my current house in 2012. I didn’t own a house between mid-2005 and early 2012.

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