2005 Federal Income Tax Analysis

Over the weekend I finished my 2005 federal income taxes. This was the most complex return for me due in part to the mid-year conversion of my house to a rental property.

Background Work
Prior to finishing my 2005 taxes this weekend, I had started some work to get to this point:
-I had purchased Taxcut for $8.96 after rebates to help me with this year's taxes.
-At the end of 2005 I reserved $3,000 of my net worth as tax liability because after I quick analysis I thought I would owe a significant amount in taxes. Now that all the dust has settled this turned out to be significantly off; I am filing for refunds on both my state and federal taxes.

Where It Went
Here is a breakdown report from Taxcut of where my money went:

I am surprised that such a high percentage of my income went to federal taxes (16%). If I recall correctly I only paid about 12% in federal income taxes for 2004. I had assumed I would pay roughly the same percentage for my 2005 taxes.

Breakdown of My 2005 Tax Return

Retirement Accounts
I maxed out my 2005 401(k) contributions and maxed out my 2005 IRA contributions in a Roth IRA.

Capital Gains
I maxed out the capital gain losses mostly as a result from carryover losses from stock sales made a couple years ago.

Interest & Dividends
As detailed earlier, I increased my interest and dividend income in 2005.

Primary Residence Conversion
I had to do calculations to determine what mortgage interest and property taxes I could deduct for the early part of year in which I treated my house as a primary residence.

Rental Property
By far the most laborious part of my return, I had to calculate and document many items for the rental activity:
-cost basis for rental property used in rental activity
-cost basis for items used in the rental including the w/d, refrigerator, etc
-cost basis for bathroom remodel project
-insurance premiums including the % from 2004's premiums and the % from the premiums paid in 2005. This included dwelling and liability insurance.
-amount of mortgage interest and property taxes paid for the house after it was converted to a rental property
-utilities between when the house was converted to a rental property and when it was occupied
-cleaning and maintenance expenses including cleaning supplies, materials used for maintenance,
-standard mileage deduction, luckily I started using a log book to record my trips related to the rental activity so this was pretty easy

Tax Reduction Strategies for 2006
I don't really have any well defined strategies other than hopeful plans to purchase a new primary residence. If I buy a primary residence, the mortgage interest and property taxes will both help reduce my taxable income for the year. However, I haven't yet found the right opportunity for me. After going through my 2005 tax return, I can honestly say I really hope an opportunity presents itself in the near future.

Benchmarking with Fellow Personal Finance Blogger's Tax Returns:
Jane Dough paid about 12% in federal income tax.
Five Cent Nickel only paid about 3% in federal income tax (WOW!).
Madame X paid $11,624 in federal income taxes.
Update: Financial Freedumb paid 17.3% in federal income tax.
Update: Flexo paid 10.9% in federal income tax.

Related in Income Taxes:

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Free Copy of TurboTax Basic (Nov 23, 2010) Intuit is offering a free download of TurboTax Basic (Federal Only) for Mac or Windows. I have found that the basic version allows you to cover all of your Federal income tax return needs, it just lacks the extra...

Comments (10)

DATE: 5:45 PM
That's not that bad...I paid 17.3% Fed...6.7% State...I need to reduce my taxes...:/

Posted by freedumb | September 10, 2006 3:17 PM

DATE: 8:16 PM
Ha, try:$110,000 fed taxes$30,000 stateThe only consolation I have is that it would be more in most other countries.And I still have potholes in the roads, failing schools and a pack of morons "running" the country (for lack of a better word).

Posted by Anonymous | September 10, 2006 3:17 PM

DATE: 12:45 AM
How can I contact the admin of this blog? I want to share some important information.Regards,Robin (robin@mortgagefit.com)

Posted by Robin | September 10, 2006 3:17 PM

DATE: 1:46 PM
Robin,I can be reached at 2millionblog@gmail.com

Posted by 2million | September 10, 2006 3:17 PM

DATE: 8:07 PM
Are you deducting your interest and taxes for your primary for the time you spent living as the roomate and renting the house out even though you didn't own any other property?Could you do that or did you do that if it is legal...

Posted by pyroracing85 | September 10, 2006 3:17 PM

DATE: 10:50 PM
No I deduct my mortgage interest and taxes as a primary residence personal deduction and then converted it to a rental property after I moved out.I doubt you can rent it to yourself, but it sounds like a good idea. The advantage would be you could depricate the building and personal property, deduct the repairs, etc that you couldn't do otherwise.

Posted by 2million | September 10, 2006 3:17 PM

DATE: 1:51 AM
Hi $2M,We finished our taxes in March - new family tradition to get them done early.I read your posting about tax % and decided to check mine:fed is 16.17%state is 4.92%But you know how it is in NC.Actually dollar amounts were pretty high, but I'll discuss it a bit in my next posting at.Regards to everyone,makingourway

Posted by makingourway | September 10, 2006 3:17 PM

DATE: 9:42 AM
Interesting - you paid a lower percentage in NC state income tax than I. Any tips? :-)

Posted by 2million | September 10, 2006 3:17 PM

DATE: 1:56 PM
I managed 10.9% in federal taxes for 2005. That's about in line with the last few years.

Posted by Flexo | September 10, 2006 3:17 PM

DATE: 11:53 PM
Have a bunch of kids... Nothing beats that child tax credit!

Posted by fivecentnickel.com | September 10, 2006 3:17 PM