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You may be surprised to learn a few things about St. Patrick’s Day. To start, St. Patrick wasn’t even Irish, he was from Britain. Second, shamrocks don’t really exist, they’re mythical plants. Finally, St. Patty is short for St. Patricia – St. Paddy is the more correct abbreviation for the holiday. For many of you, St. Patrick’s Day is not the only green-themed event on your mind this week as the biggest money event of the year is fast approaching – the income tax filing deadline, April 15th. Although not nearly as fun as Irish trivia, we thought we would also share some important facts about taxes that may surprise you.
State Surprise! You may have been surprised to receive a 1099 from your state’s franchise tax board. This is because any amount of state income tax refunded to you is subject to federal tax in the following year. You are hearing this correctly – your state income tax refund is taxable at the federal level. In all fairness, you did receive a federal deduction for state taxes paid the prior year, so it could be a wash but, the 1099 may still come as a shock. If you are receiving large state refunds, consider adjusting your withholdings to avoid a short-term loan to the government.
Mortgage Myth. Despite popular belief, not all mortgage interest is deductible. Interest is only deductible on the first $1M of borrowed funds used to buy, build or improve a home. So, if you purchase a home for more than $1.25M and put 20% down, you will not be able to deduct all of your interest payments. Additionally, interest paid on an equity line used for purposes other than to buy, build or improve your home, is only deductible on the first $100K.
Underpay and Pay. It’s no surprise that the IRS wants your money, and they want it now (or at least on time). If you do not withhold enough in taxes throughout the year, you could be subject to an underpayment penalty when you file. For most people, payroll withholdings facilitated by an employer will be sufficient. For the self-employed, retirees who are not collecting a paycheck, or workers with other substantial sources of income, however, the responsibility is on them to make timely estimated tax payments.
Add More Tax. An easy way to remember what “AMT” (Alternative Minimum Tax) means, think: add more tax. Simply put, AMT is an alternative “equation” to calculate your income tax liability. If this second way of doing math ends in a larger tax liability, then you will pay more.