Tax benefits of owning a home

Deducting mortgage interest

In most cases, you can fully deduct your mortgage interest secured by your primary or secondary home. Beginning in 1987, mortgage interest to buy, build, or improve your home (acquisition debt) up to $1,000,000 or home equity loans up to $100,000 became tax deductible.

Points (also known as origination fees or discount points)

Generally, points paid to obtain a loan on your home or to reduce the interest rate can be fully deducted in the first year. You also have an option to deduct this amount over the life of the loan.

Points paid to refinance a mortgage are generally not fully deductible in the year you pay them. However, if you use a portion of refinanced loan proceeds to improve your primary home, you can fully deduct the part of points related to the improvement in the year paid. The reminder of the points can be deducted over the life of the loan.

If you have been deducting your points over the life of your mortgage and it ends due to a payment in full or refinancing, do not forget to deduct the remaining amount of points in the year the mortgage ends.

Property taxes

Property taxes paid on real estate that your own are also tax deductible.

These deductions can be claimed on Schedule A (Itemized deductions) of your tax return.

- You can also deduct late payment charges, mortgage prepayment penalty and moving expenses.

- Some expenses that are not tax deductible are: HOA fees, title, mortgage or hazard insurance, the principle part of your mortgage, or appraisal and inspection fees.


Tax-free profits

When you sell your primary residence, you can exclude the entire gain up to $500,000 for couples who file jointly or up to $250,000 for single filers. In order to qualify, you have to meet the ownership and use test (you must have lived there for at least two of the previous five years as your primary residence). You can only claim this exemption once every two years. Extenuating circumstances such as health, change in place of employment or a qualified unforeseen occurrence may allow you to claim a partial exemption if this period is less than two years.
Please consult your tax, legal, or investment advisor when making financial decisions. For additional information please visit http://www.irs.gov/pub/irs-pdf/p936.pdf.

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Roth IRA Basics and Benefits

The Roth IRA is one of the smartest saving and retirement planning tools available to investors. Unlike the traditional IRA or 401K, contributions to the Roth IRA are not tax deductible, but the benefit of the Roth IRA is the ability to make withdrawals tax-free when you retire.

Other Roth IRA Benefits
• Contributions can be taken out at any time without taxes or penalties.
• Under special circumstances (Qualified Distributions), withdrawals of earnings (capital gains, interest, and dividends) are penalty and tax free.
• Contributions may be made after age 70 ½ as long as you have earned income.
• Since you have already paid taxes up front, there are no minimum distribution requirements after age of 70 ½.
• At death, funds remaining in your Roth IRA will go to designated beneficiaries (they will be subject to a minimum distribution requirement). This provision makes Roth IRA a great estate planning tool.

What Are Qualified Distributions?

To be tax-free and penalty free, a distribution of earnings must meet two tests:
1. Withdrawals are taken after the 5-year holding period, and
2. One of the following requirements applies.
The distribution is:
• Made on or after you reach age 59 ½,
• Made because you are disabled,
• Made to a beneficiary or to your estate after your death, or
• For the first-time home buyer (up to a $10,000 lifetime limit per person, $20,000 for couples).

Eligibility

You may be eligible to make a regular contribution to a Roth IRA even if you participate in your employer-sponsored retirement plan. The most common way of establishing a Roth IRA is by making cash contributions. In order to be able to contribute up to $5,000 per year to a Roth IRA for 2007-2008 ($6,000 if you are 50 or older) you will need to fulfill both requirements:
1) Your adjusted gross income has to be less than $99,000 if you are single or $156,000 if married filing jointly. The amount you can contribute is reduced gradually and then completely eliminated when your modified adjusted gross income exceeds $114,000 for single, or $166,000 if married filing jointly.
2) You or your spouse must have compensation or alimony income in excess of the amount contributed.

Another way of funding Roth IRA is by converting your traditional IRA. The only requirement is that your modified adjusted gross income is less than $100,000. Please note that the amount converted will be added to your income and taxed at the prevailing rate.

Here is the good news

1) The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) will eliminated the $100,000 modified adjusted gross income (AGI) limit effective 2010.
2) Under TIPRA, income from a 2010 conversion of a traditional IRA to a Roth IRA is included in the taxpayer’s income over a two-year period, beginning in 2011.

This will provide numerous planning strategies, so contact your financial advisors and start planning early.

Please consult your tax, legal, or investment advisor when making financial decisions. For additional information please visit http://www.irs.gov/pub/irs-pdf/p590.pdf

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