Buying a home to cash in on home buyers tax credit?
November 12, 2009 by Jean Keener, CRPC, CFDP · 2 Comments
You may have heard that the first-time home buying tax credit was extended through April 30 next year, and that it now includes a credit for some non-first-time home buyers also. For details on the extension and who is eligible, visit the IRS website.
This is great news if you fall into the eligible groups and were already planning to purchase a home. A tax credit is an actual dollar-for-dollar credit against your tax liability, as compared to a tax deduction which just reduces your taxable income. A deduction, depending on which tax bracket you’re in, saves you between 10% and 35% of the deduction. The credit saves you 100% of the credit amount. The home buying credit is also fully refundable, which means you can receive it even if it exceeds your tax liability.
Should you adjust the timing of your home purchase to take advantage of the credit?
Yes, this is a good idea. If it’s just a question of changing your timing by a few months to take advantage of the tax credit and there aren’t other substantial costs with the change, that makes all the sense in the world.
If you weren’t planning to purchase a home already, should this credit motivate you to take action?
Definitely not. If you weren’t planning to buy a home and aren’t financially ready for the purchase, this tax credit doesn’t significantly change that math.
For existing home owners, the costs of a move are too high to even come close to being offset by this credit. Consider real estate commissions, preparing your home to sell, closing costs on the new home, moving expenses, and ongoing increases in your utilities, maintenance and property taxes if you move to a larger home.
For potential first-time home buyers, the credit doesn’t significantly change whether home ownership is right for you. Yes, the $8,000 is a nice bonus. But it’s a small dent in the costs of owning a home over even the 3-year minimum required to not pay back any of the credit. The mortgage is just the beginning of the cost of home ownership – consider maintenance, repairs, yard work, and utilities that are typically higher in a home than an apartment. There’s also the property tax and insurance which for most first-time home buyers will be escrowed into their total mortgage payment, however it’s up to the home owner to catch up any shortfall in the amounts escrowed.
Bottom line, you should definitely take advantage of the home buyers credit if it fits in with your overall financial plan. The credit could even provide a good opportunity for you to jump-start your 2009 or 2010 IRA contributions, beef up your emergency fund, or start a 529 plan for your children’s college. But the credit shouldn’t tempt you to make a decision that will end up hurting you financially long-term. Make sure your math includes the long-term total cost of your move!
November 2009 Newsletter
November 5, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
The November newsletter is now available. It includes a market update, 2010 retirement plan contribution limits, and more. Click here to view it.
2009 Year-End Tax Planning Checklist
November 4, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
Reviewing your tax situation for the year when you still have time to do something about it is always a good idea. You have many more options to affect your tax liability by acting before the year ends. This year, it’s still important to review all the regular opportunities available every year, but we also have many unique opportunities for 2009 that can save you additional money.
Some of the standard areas to consider
If you think your tax bracket next year will be the same or lower than your tax bracket this year, look for opportunities to defer income to 2010 and accelerate deductions. However, if you are subject to the Alternative Minimum Tax, give this special analysis because these actions don’t always work to your benefit with the AMT.
Max out employer retirement plan contributions before year end — $16,500 for a 401(k), plus an extra $5,500 for those 50+ before December 31. Make IRA contributions prior to April 15.
If you are self-employed, set up a retirement plan if you haven’t already done so.
Review the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little or too much for this year. Don’t forget that you can set aside amounts to get tax-free reimbursements for over-the-counter drugs.
If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year’s worth of deductible HSA contributions for 2009.
Those facing a penalty for underpayment of federal estimated tax may be able to eliminate or reduce it by increasing their withholding before year-end.
You may wish to realize losses in your investment portfolio. Up to $3,000 can be deducted from your income each year.
You can save gift and estate taxes by making gifts within the annual gift tax exclusion before the end of the year. You can give $13,000 in 2009 to an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next. The limit applies to each person, so a married couple can give $26,000 total to each person.
Some of the special consideration for 2009
Required Minimum Distributions suspended for 2009 — If you already took an RMD for 2009, you may be able to roll over the RMD to the same (or to a different) IRA or eligible retirement plan–you generally have until the later of 60 days from the time you took the distribution or November 30, 2009.
Roth IRA 2010 conversions – It’s worth looking ahead to 2010 when special rules will apply to Roth conversions. These rule changes might influence your actions now by planning to defer deductions to offset future taxes or by making non-deductible traditional IRA contributions now in anticipation of converting them later. Click here to read my blog post on 2010 Roth conversions.
Depreciation rules for 2009 allow an additional 50% first-year depreciation deduction for qualifying property purchased for use in your business on or before December 31. In lieu of depreciation, Section 179 deduction rules allow for the deduction, or “expensing,” of up to $250,000 of the cost of qualifying property placed in service during 2009. Currently, that limit is scheduled to drop to $125,000 (adjusted for inflation) in 2010.
A tax credit of up to $8,000 is available in 2009 for qualified first-time homebuyers (only homes purchased before December 1, 2009, qualify).
The first $2,400 of unemployment compensation received in 2009 is excluded from income for federal income tax purposes.
If you itemize deductions, 2009 is the last year you’ll have the option to deduct state and local sales tax instead of state and local income tax (as the law currently stands).
Individuals who do not itemize deductions are able to claim an additional standard deduction of up to $500 ($1,000 for married couples filing jointly) for real estate property taxes paid for 2009, the last year this deduction will be available (as the law currently stands).
The temporary deduction for sales and excise tax relating to the purchase of a qualified new automobile, light truck, or motorcycle applies to vehicles purchased through December 31, 2009.
The above-the-line (maximum $4,000) deduction for qualified tuition and related expenses expires at the end of 2009, as does the above-the-line deduction for up to $250 in out-of-pocket classroom expenses paid by educational professionals.
Individuals age 70½ or older have only until December 31, 2009, to make charitable contributions of up to $100,000 directly from an IRA to a qualified charity, without including the distribution in income.
Special considerations for high income earners
Many expect top tax rates on ordinary income to increase after 2010, making long-term deferral of income less advantageous. Long-term capital gains rates could go up as well, so it may make sense for some to accelerate substantial profits into this year instead of a few years down the road. It also makes sense to proceed with caution in any Roth conversion strategy to determine the most advantageous year or years to pay the conversion tax. This decision can be delayed until you file your 2010 taxes by which time hopefully there will be more clarity on this issue.
There is some good news for high-income earners. There will no longer be an income based reduction of most itemized deductions, and there also won’t be a phase-out of personal exemptions. Traditional IRA to Roth IRA conversions will also be allowed regardless of a taxpayer’s income.
Consult your tax advisor
With all of the items on this checklist, there are potentially many nuances and additional rules not listed here. It’s important to consult with your tax advisor prior to implementing any of these suggestions.
Charitable Giving as Part of Your Estate Plan
November 3, 2009 by Jean Keener, CRPC, CFDP · 1 Comment
As the holidays approach, it’s a good time to consider charitable giving as a potential part of your estate plan. Giving provides a sense of personal satisfaction, and it can be beneficial from a financial planning perspective.
If you’re one of the 2% of Americans currently subject to the estate tax, planned charitable giving can be a powerful estate planning tool. Even if estate taxes aren’t an issue for you, charitable giving can still provide a satisfying opportunity to leave a financial legacy. And a well-planned gift can maximize its benefits to you and the charity.
Usually when people leave a gift to a charity as part of their estate, it’s an organization they’ve had significant contact with during their lifetime. However, it’s still a good idea to check out how the charity uses donated funds prior to planning for a substantial estate donation. You can do this through a charity tracking organization like Charity Navigator or by asking questions directly of the charity about their use of funds, the percentage of donations that go directly to programs, and how your gift would be used.
Once you’ve selected the charity or charities, here are some of your options for gifting techniques.
Put the charitable gift in your will
The easiest and most direct way to make a charitable gift is by an outright bequest of cash in your will. Making an outright bequest requires only a short paragraph in your will that names the charitable beneficiary and states the amount of your gift. The outright bequest is especially appropriate when the amount of your gift is relatively small, or when you want the funds to go to the charity without strings attached.
Name the charity as beneficiary of an IRA or retirement plan
If you have funds in an IRA or employer-sponsored retirement plan, you can name your favorite charity as a beneficiary. Naming a charity as beneficiary can provide double tax savings. First, the charitable gift will be deductible for estate tax purposes. Second, the charity will not have to pay any income tax on the funds it receives. This double benefit can save combined taxes that otherwise could eat up a substantial portion of your retirement account.
Use a charitable trust
Another way for you to make charitable gifts is to create a charitable trust. There are many types of charitable trusts, the most common of which include the charitable lead trust and the charitable remainder trust.
A charitable lead trust pays income to your chosen charity for a certain period of years after your death. Once that period is up, the trust principal passes to your family members or other heirs. The trust is known as a charitable lead trust because the charity gets the first, or lead, interest. You would use the charitable lead trust when you’re optimistic about the future performance of the investments you place in the trust.
A charitable remainder trust is the mirror image of the charitable lead trust. Trust income is payable to your family members or other heirs for a period of years after your death or for the lifetime of one or more beneficiaries. Then, the principal goes to your favorite charity. The trust is known as a charitable remainder trust because the charity gets the remainder interest. Depending on which type of trust you use, the dollar value of the lead (income) interest or the remainder interest produces the estate tax charitable deduction. A charitable remainder trust takes advantage of the fact that lifetime charitable giving generally results in tax savings when compared to testamentary charitable giving.
However you choose to give, planning for it in advance and considering its overall impact both to your estate and the charity can provide maximum impact for your generosity.