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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Ways to Lower My Bills

Ways to Lower My Bills

In order to reduce expenses and save money, it is vital to know where your money is spent. That is why the best way to lower bills is to create a budget and stick to it.

Creating a Budget:

- The first step toward taking control of your financial situation is to do a realistic assessment of how much money you take in and how much money you spend.

- Start by listing your income from all sources – like salary, wages, social security, pension/retirement, interest on accounts, child support/alimony, real estate rent, investment dividends, unemployment and other take home income.

- Then, list your “fixed” expenses — those that are the same each month — like mortgage payments or rent, car payments, and insurance premiums.

- Next, list the expenses that vary — like entertainment, recreation, and clothing.

- Write down all your expenses, even those that seem insignificant. It is a helpful way to track your spending habits, identify necessary expenses, and prioritize the rest.

- The goal is to make sure you can make ends meet on the basics: housing, food, health care, insurance, and education.

Remember: The key to effective money management is to spend less than you make.

You can download a free budget worksheet at Microsoft.

Your public library and bookstores have information about personal finance, budgeting and money management techniques. In addition, computer software programs can be useful tools for developing and maintaining a budget, balancing your checkbook, and creating plans to save money and pay down your debt.

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Make the most out of your 401(k)

This year (2007) you can contribute up to $15,500 to your employers’ 401(k) plan. If you are older than 50 add an extra $5,000 in catch-up contributions for a total of $20,500. If you are eligible to participate and your employer offers matching contributions there is really is no reason for you to say “no” to this free money. This is probably one of the best ways to achieve your desired retirement income.

Benefits of 401(k) participation:

It’s easy & helps lower your taxes
You decide how much you want so save. Your contributions are automatically deducted from your paycheck before federal and state income taxes are calculated. This reduces your taxable income by the amount of your contribution and saves you tax dollars.

Your money grows faster
Your contributions and company match may grow further through investments in stocks, mutual funds, and money market funds. The important point is that this is tax-deferred growth. Taxes are paid when you withdraw the money at retirement; usually at a much lower tax rate.

Rollover option
When you change jobs you have an option to rollover your vested 401(k) balance into an IRA or a new 401(k) plan. Do not cash it out or take possession of that money. Instead, use a direct rollover and your current company will send your check to the new IRA or 401(k) trustee.

Flexibility
Most 401(k) plans have hardship withdrawals and a first time home buyer provision.

Visit your employer's human resources department and learn everything you can about 401(k) plan offered. Your financial advisors should be willing to give you advice as well. Start as early as your can. Time (number of years investing), compounding interest, and persistency all work in your favor.

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Saving Energy = Saving Money

An easy way to save money is to conserve energy.
Not only is it good for your wallet, it’s also good for the environment.

Look for the ENERGY STAR logo.

ENERGY STAR is a government-backed symbol for energy efficiency. It is a joint program of the U.S. Environmental Protection Agency and the U.S. Department of Energy helping us all save money and protect the environment through energy efficient products and practices.

Appliances

When buying an appliance, remember that it has two price tags: what you pay to take it home and what you pay for the energy and water it uses. ENERGY STAR qualified appliances use 10–50% less energy and water than standard models. The money you save on your utility bills can more than make up for the cost of a more expensive but more efficient ENERGY STAR appliance.

Compact Fluorescent Light Bulbs

When replacing lightbulbs, you should also look for the ENERGY STAR qualified compact fluorescent light bulbs [CFLs]. These light bulbs fit into a standard incandescent socket and use 2/3 less energy than a standard incandescent and last much longer. This translates into a savings of $30.00 or more in energy costs over each bulb’s lifetime.

For more information about ENERGY STAR visit www.energystar.gov.

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Have you over looked these 2006 tax deductions?

Telephone tax refund – This is a one-time refund and many taxpayers are not aware of its existence. Married couples, with no children, can receive a $40 refund. Those with one child can claim $50 & those with two, $60. If you kept your phone bills for the last three years and the telephone excise tax on your invoices exceeds these credits, you can apply the actual amount.

Child care credit – If you paid for child care while working, you can claim a tax credit on your tax return. It is worth up to $3,000 for one dependent and up to $6,000 for two or more. You must be able to identify the child care provider on your tax return and be able to submit their SSN or Tax ID number.

Education credit – If you attended college last year, you might be eligible for a Hope Credit or Lifetime Learning Credit. You can also deduct up to $2,500 in student loan interest. This amount begins to phase out when modified Adjusted Gross Income (AGI) exceeds $50,000 ($105,000 for Married Filing Jointly).

Saver’s credit – If your AGI is less than $50,000 and you are setting money aside in your IRA or employer-sponsored 401(k), you will earn this extra credit. This credit is actually a reward for your saving efforts.

Alternative fuel vehicle credit – Purchase of one of the certified hybrid vehicles last year will earn you as much as $3,150 in tax credit. The precise amount of the credit depends on the make, model of the vehicle, and when the vehicle was purchased. For details visit http://www.irs.gov/newsroom/article/0,,id=165649,00.html.

Charitable contributions – If you itemize your taxes (Schedule A), do not forget to add all your charitable contributions. If the amount of non-cash property is in excess of $500, Form 8283 needs to be filed.

IRA deductions – Contributions to Traditional IRAs help reduce your taxable income. Even if you or your spouse participated in an employer-sponsored 401(k), you might be able to contribute to an IRA. The amount of deductibility needs to be calculated, so check with your tax preparer. This year’s maximum contribution is $4,000 per person ($5,000 if you are 50 years of age or older).

Please consult your tax, legal, or investment advisor when making financial decisions.