Thursday, June 4, 2015

Think first before deducting the kitchen sink!

original Linkedin repost from Jan. 6, 2015

The first three months of the year is an exciting time for everyone, but especially for broke people like me who live from paycheck to paycheck and hope for some type of financial windfall from somewhere (anywhere). I usually file my taxes early and pray the feds will send me a big refund instead of a big bill.
However, there is a lot one should consider when they are filing their taxes. The way you file can have a negative effect on your buying power. As a business owner, independent contractor, entrepreneur or regular employed taxpayer, you know there are a lot of opportunities for deductions. There are ways one could wind up being taxed on less than eighty percent of their income, but what are the consequences of taking all of those deductions? The meals you had during those Avon sales meetings, dry cleaning costs for your work uniform, figures regarding your "home office" (the laptop on the nightstand) can all be considered in your itemization sheet of course, but is it a good thing to itemize up to ten, twenty, thirty percent of your gross salary? The answer: it all depends. It depends on your financial situation.

Do you own a home? Are you looking to take out a personal loan? Is your AGI, adjusted gross income, large enough to not suffer from the tagging of one deduction after the other?
If you are looking to be a home owner anytime soon, the less deductions the better, actually. Listed below are some of the misconceptions, many people have about filing taxes and applying for a mortgage.
Misconception #1 "The more deductions, the bigger my refund, the bigger the refund the more I have for a down payment! Yay!"
Don't do the "cold cut shuffle" just yet, my friend. Your deductions could be the very reason the mortgage loan is not approved. Unfortunately, I am speaking from experience. In 2010, I selected a well known Texas home builder, received that hallowed preapproval letter from their special loan officers and watched a three bedroom home be built to my exact specifications.
I picked the tile, the carpet, the kitchen backsplash, even the door. I love a home with a red door. I have to have a red door. I just have to. Everything was going well. The loan people had helped me repair my credit. My score was good enough for FHA and I had a stable income. I was also in the last couple months of pregnancy, so I was ready to move from my stuffy apartment fast. I had told everyone I knew about my house. I drove by it everyday and watched it go up brick by brick. I had even started looking for an affordable interior decorator. Then, BAM! The door was slammed in my face days before I was supposed to close.
"What's up with your AGI? You did your own taxes? Your AGI is low!"
My real estate agent called me with a barrage of questions about my tax returns and W2s. She explained that the underwriters would not approve me with such a low AGI. I was confused.
"Yea, you took over $9,000 in deductions. Your AGI is only $34, 000!"
Back then, along with my day job, teaching English, I had a small publishing business and writer's club that I used as a basis for my many itemizations. I wrote off gas, work clothes, plane tickets, phone bills...everything I could and I was accustomed to getting tax refunds ranging from $1,200 to $2,500 each year. Like many, I was not educated on how the write-offs could affect my strength as a consumer. I was smacked with a stop sign again years after the mortgage nightmare when I applied for a personal loan with Cumulus Funding . They also turned me down stating the results were due to my low AGI.
It sucks being denied cash when you need it.
Almost every publication from every popular tax preparer advises us to take the standard deduction when filing our taxes. Think about it. This year if I take the standard deduction, $9,100 will be deducted from my taxable income amount. Therefore $9,100 will be deducted from my AGI. When loan officers consider my application, they will see my adjusted gross income less the $9,100 and that alone could send my application to the recycle bin. If I take the itemized deduction of $3,100 instead of the standard deduction, it will make a huge difference in my AGI. The bigger the AGI, the bigger the chances for loan approval.
Misconception #2 "My loan is pre-approved, so I pretty much have the house."
That's what I thought, but the cold truth is: Pre-Approved does not equal Approved. Until those hundreds of mortgage documents are signed at the title company and the house keys are placed in your hand, you are not approved. The underwriters have the final say. Nothing moves forward without a green light from them.
Misconception #3 "They have my paystubs. They'll base the loan decision on those numbers."
Submitting your paystubs and social security number begins the loan decision process, but from the underwriter's perspective your AGI determines how much of a loan you can afford. Honestly, I am in a bad position now because my AGI determines that I can only be approved for about $50,000 dollars worth of house.
A $50,000 mortgage is basically a cash house or a foreclosure and there has to be monies set aside for renovations and repairs that are pretty much inevitable when dealing with foreclosures and short sales. Disgruntle homeowners do not typically leave foreclosed homes in good condition. The new owner may have to replace the light fixtures, carpet, plumbing, even the kitchen cabinets before they can consider the place livable, although it may be a good deal overall. Check out this article from Home Guides for more clarification; How does AGI Impact Applying for a Mortgage?
Another point I would like to make here is; saving money has many benefits.Savers win on each side of the coin. According to one of my favorite money experts, Suze Orman, your savings account should hold 3x your monthly income.
When you save or invest a part of your salary, it can also be written off as a tax deduction. If your net income is $70,000 and your deductions/write-offs equal up to $5,000, your taxable income will be $65,000. I know I said to be careful about doing too many deductions, however for those who are already homeowners and will not need any type of loan in the future, having money directed to a 401K, 403B, Annuity, or 501c3 can be the right decision. Saving and investing can have triple the payoff: substantial tax write-offs, financial security, and offer peace of mind.There is nothing more relaxing than knowing if an emergency arises you and your family have a safety net and everyone will have money for college when the need comes. When facebook went public I bought about $60 worth of shares. Today those three little measly shares are valued at $174 dollars. If I would have bought $1,000 worth when they first hit the market, I could have sold those same shares for about $3,000 today. Saving to invest is smart. I wish I has $1000 saved up to buy more shares at the time, but I was broke. Truth is; Investing wisely can supplement your income better than anything else.
Spend wisely and don't be like me; Save a lot of cash; Invest wisely; Take higher deductions if you are already a homeowner; Take lower deductions if you are looking to qualify to be a homeowner (in the near future). Do your research and make sure the numbers are all in your favor before pushing that submit button on or signing on the dotted line at your local tax office.

No comments:

Post a Comment