Tax Bracket Structuring for IPs

[hwd007]

Say I am close to the lower tax bracket limit after claiming my IP loss. Say after IP effects my new taxable income is 50,500 which puts my in the 42c tax bracket for tax re-calculation.

I have used 2002 - 2003 tax rates here.

i.e. $50,001 – $60,000
$11,380 plus 42c for each $1 over $50,000

thus my tax is $11,380 + ( $499 * .42 ) = $11,589

No say I spent $600 on painting the property or general wear and tare repairs of one sort or another, prior to tax time. This would mean my taxable income would be less $600 being $51500 - $600 = $49900 Thus now I have fallen into the lower tax bracket calculation of ;

$20,001 - $50,000
$2,380 plus 30c for each $1 over $20,000

thus my tax is $2380 + ( 29900*.30 ) = $11,350

Thus $12009 - $11350 = $239 difference in tax paid. I admit this is not much of a saving.! But in effect the tax saving has partly paid for the repainting or general repairs of $600. Also this $239 represents a $4.50 per week cash saving, by structuring the IP and costs with the tax system.

Hmm starting to look like no benefit at all actually when you consider that the expense of $600 would be deductible at the higher bracket also.

Oh well it was worth the mental exercise for me.

Anyway this is what I was getting at.

I have corrected the figures. I think :/

 

[Kevmeister]

Yes, you effectively have the right idea but unfortunately you have made an error in your calculation, and you should be aware of the outcome:

$51,500 - $600 = $50,900, not $49,900 as you have said.

So your new tax is:

$11,380 plus 42c for each $1 over $50,000

thus my tax is $11,380 + ( $900 * .42 ) = $11,758

So the tax difference is $12,009.58 - $11,758 = $251.58

So the tax refund has NOT covered the cost of your painting/repairs.

Everyone who earns an income has what is known as their "marginal tax rate". If you earn $51,500 per year every extra dollar you earn (up to the next tax bracket) is taxed at 42 cents in the dollar.

A quick cross-check is that for your $600 claimed as an expense you will get back 42 cents in the dollar.

600 * .42 = $252

which is near enough to the $251.58 from the previous calculation. Obviously this cross-check doesn't work when you cross a tax bracket, but it gives you a reasonable idea.

Another worthwhile thing to remember is that claiming something as a tax deduction can never return more back to you (as a tax refund) than what you spent. You will only get "some" of it back as a refund.

 

[hwd007]

sorry yea