Get Here: Inflation Doesn’t Tell The Entire Story

Monday, December 13, 2010

Inflation Doesn’t Tell The Entire Story - Bargaineering

Posted: 13 Dec 2010 04:33 AM PST

Here’s an interesting question – would you rather have $70,000 in 1900 or $70,000 now?

Those who are familiar with the idea of inflation are probably aware that $70,000 in 1900 is worth a lot more than $70,000 today. In fact, according to the BLS, $70,000 in 1913 (as far back as their calculator goes) is worth over $1.5 million today.

The bigger question, and the point of Tim Harford’s post, is that while you might have $1.5 million a year back in 1900, your quality of life wouldn’t be as good as it is now. With the advances in a variety of fields, there are things that exist today that people couldn’t dream of in 1900. For example, the life expectancy of a male born between 1900-1902 was a mere 47.9 years (women could expect to live to 50.7). In 2003, that rose to 74.8 years for men and 80.1 years for women. As a man, you might make $1.5 million a year but you could enjoy that for 26.9 fewer years without air conditioning, a car (Ford would manufacture its first Model T in 1908), planes, or the Internet.

So while you might have more money, you wouldn’t have enough to buy many of the comforts we’re used to today. Personally, I’d rather have $70,000 today, sit in my nice warm house with my beagle Tobey, and typing away on my computer reading thought provoking articles written by the world’s smartest minds.

As an aside, I was first introduced to the work of Tim Harford after discovering his book, The Undercover Economist, a few years back. If you are a fan of “real life” economics (not necessarily of interpreting supply and demand charts), his book is a very entertaining read. His second book, The Logic of Life is pretty good too.

Inflation Doesn't Tell The Entire Story from personal finance blog Bargaineering.com.

The Standard Deduction

Posted: 13 Dec 2010 04:24 AM PST

Tax deductions are wonderful, aren’t they? While they’re not as good as a nice tax credit, tax deductions can reduce your tax liability significantly depending on your income tax bracket.

In the United States, you have two options when it comes to claiming deductions. You can go the easy route of claiming the standard deduction, which is a set amount each year that requires no documentation, or you can itemize your deductions, which allows you to select which deductions you want to claim and requires you to back it up with documentation.

Standard Deduction (2006-2011)

When you claim the standard deduction, you can’t also claim itemized deductions. For example, if you claim the standard deduction, you won’t be able to claim any mortgage interest as a deduction. You won’t be able to claim charitable contributions. It’s an either or choice – standard or itemized.

Here are the base standard deduction amounts for tax years 2006 through 2011:

Year	Single	Married Filing Jointly	Married Filing Separately	Head of Household
2006	$5,150	$10,300	$5,150	$7,550
2007	$5,350	$10,700	$5,350	$7,850
2008	$5,450	$10,900	$5,450	$8,000
2009	$5,700	$11,400	$5,700	$8,350
2010	$5,700	$11,400	$5,700	$8,400
2011	$5,800	$11,600	$5,800	$8,500

Deduction Adjustments

Age, Vision Adjustment: If you are 65 years or older, your spouse is 65 years or older, legally blind and/or your spouse is legally blind, you can have an adjustment of $1,400 for single and HOH filers, $1,100 for married filing jointly (per person) per condition.

If you are married, both are over 65, then you increase your standard deduction by $2,200 ($1,100 x 2). If you are married, both are over 65 and both are blind, then you increase your standard deduction by $4,400 ($1,100 x 2 x 2).

Real Estate Taxes: If you paid state or local real estate taxes that you could otherwise claim as an itemized deduction, you can get up to $500 (single filers) or $1,000 (married filed jointly) increase to your standard deduction.

Itemize or Standard?

For 2011, a single filer can claim a $5,800 standard deduction on their income tax return. If that filer’s itemized deductions exceed $5,800, it’s better to claim itemized deductions. If they do not exceed $5,800, then it’s better to claim the standard deduction (also because it requires less paperwork).

Above-The-Line Deductions

Above-the-line deductions, officially called “adjustments to income,” are tax deductions that apply even if you claim the standard deduction. Whereas the mortgage interest rate deduction is only available if you itemize your deductions, contributions to an IRA or 401(k) are “adjustments to income.” These adjustments to income reduce your adjusted gross income (AGI) and, consequently, your taxes. Student loan interest, moving expenses, alimony and many others are considered above-the-line deductions (the list is pretty long and governed by Internal Revenue Code Section 62(a)(1)).

That’s the standard deduction in a nutshell. I hope that explanation comes in handy as you prepare your taxes this year!

The Standard Deduction from personal finance blog Bargaineering.com.