Category: Taxes

Did you know? subject: IRA tax deductions

Posted on by Evan in Investing, Taxes

While sitting in my financial planning class this weekend I learned something that I never knew before.  Did you know that if you are covered by an employer sponsored retirement plan (i.e. 401K) then your contribution to a traditional IRA may not be tax deductible?

In other words, let’s say that you contribute 5-10% of your wages towards a 401K program.  In addition, you also contribute money to a traditional IRA.  Unless you max out your employer sponsored plan your contribution to your IRA may be, may not be, or may be partially tax deductible depending on your Adjusted Gross Income for that year.

I always thought no matter what you were allowed to deduct you entire traditional IRA contribution.  Here is a link to publication 590 which deals with the subject on the IRS website.

Gift Taxes- what consumers need to know

Posted on by Evan in FHA, Taxes

By most estimates FHA loan originations now make up somewhere between 33-50% of all mortgage fundings.  One of the nice flexibilities about FHA loans is that it allows the borrower/ homebuyer to receive their down payment (minimum of 3.5%) entirely as a gift from a family member.

With the first-time homebuyer credit in effect we have seen a lot of this lately as parents encourage their children to buy so that they can buy their first home and receive an $8,000 tax credit.

However, most parents and children are not familiar with the tax treatment of cash gifts.  Therefore I wanted to provide a quick outline of the most applicable points & a link to the IRS website where more information is available.

Major points:

*An individual may gift up to $13,000 to another individual in 2009 and exclude all gift taxes.  A couple may each gift up to $13,000 ($26,000 total) to an individual and exclude gift taxes.

*If a person gifts more than is allowable under the annual exclusion then they can avoid paying gift taxes in the immediate term by subtracting the amount of the excess gift from their $1,000,000 lifetime exclusion.

For example, let’s say John & Judy Williams gift $50,000 to their son James in 2009 so that he may buy his first home.  Each parent is able to exclude up to $13,000 from gift tax liability for a total of $26,000.  The remaining $24,000 is then deducted from their $1,000,000 lifetime exclusions ($12,000 each).  Therefore, they’d be able to gift/ or pass through their estate up to $988,000 and still avoid gift/ estate taxes.

OR 529 tax deduction increases

Posted on by Evan in Investing, Taxes

As a participant in the Oregon 529 college savings program I was happy to read this post from the “It’s Only Money” blog.

This year the state of Oregon will allow you to deduct up to $2,085 (individuals) and $4,170 (joint filers) on your state income tax return for contributions made to the program.  Keep in mind that the growth of your investment is also tax free and distributions are tax free when made to qualifying education expenses.

Check your property tax bill this October….

Posted on by Evan in Taxes

Have you thought about trying to reduce your property tax liability?  I came across this article on the CNN money website over the weekend and thought I would share it to those who would like to try and appeal their property taxes in the upcoming year.

In Oregon property tax statements are generally issued near the end of October or beginning of November.  Since property values have declined over the past couple years many property owners may have a case for disputing their tax accessed value with the respective county they live in.

According to recent data from the S & P Case Shiller Home Value index prices in Portland are down 15.2% from a year ago.

Good luck!

Expanded credit for first-time homebuyers

Posted on by Evan in First-Time Homebuyer, Taxes

On August 5th, 2008 I blogged about the first-time home-buyer tax “loan” which President Bush signed into law. I thought I would update this post to reflect the changes that President Obama enacted with the Recovery and Reinvestment Act of 2009:

*Who qualifies for this credit? Anyone who buys a home from April 9, 2008-June 30, 2009 January 1, 2009-November 30, 2009 who is buying their first home or who had not owned a new home in the previous 3 years from the date of purchase.

*What are the terms of the credit? The credit is actually an interest-free loan (under the new law there is no repayment obligation) worth up to $7,500 $8,000 for couples filing jointly or $3,750 $4,000 for those who file individually.  A tax credit is different from a tax deduction in that it actually reduces your tax liability dollar for dollar (whereas a tax deduction reduces your taxable income which means your tax liability is only reduced by the amount of the deduction times your marginal tax rate). As an example, if you were expecting a tax refund for $2,500 you’d actually get $10,000 ($7,500 more) with the tax credit.

However, you don’t get to keep this tax credit money for ever. The IRS will then collect $500 per year ($250 for individuals) for 15 years from your tax refund (or added to your tax bill) to repay the credit. Although this is kind of drag this is still a great deal.

*How much will this help? It’s difficult to say for sure how much of an impact this will have. However, if I were a first time home-buyer and didn’t have a down-payment saved up one possibility for me would be for me to borrow $7,500 from a family member or close friend to use towards a down payment (FHA loans only require 3% down so I could buy a $250,000 home and put 3% down with this tax credit) and then pay back the loan when my tax refund became available.

The tax credit does phase out for individuals earning $75,000+ & couples earning $150,000+.

Tax laws: Emergency Economic Stabilization Act of ’08

Posted on by Evan in Housing & Financial Legislation, Personal Finance, Taxes

Much of the attention regarding the new “bailout bill” has focused on the $700 billion that the Federal Government will allow the US Treasury to use in order to stabilizing the financial system.

However, there were a lot of new tax laws that also found their way into the bill.  2008-emergency-economic-stabilization-act.pdf.

Here are some highlights:

* The rescue plan extends a temporary rule for cancellation of indebtedness income. When a lender forecloses on property, sells the home for less than the borrower’s outstanding mortgage and forgives all or part of the excess mortgage debt, the tax code treats the canceled debt as taxable income to the homeowner. The Mortgage Forgiveness Debt Relief Act, enacted in late 2007, excludes from federal tax those discharges involving up to $2 million of indebtedness ($1 million for a married taxpayer filing a separate return) secured by a principal residence and incurred in the acquisition, construction or substantial improvement of the residence. The new law extends this treatment from the end of 2009 through 2012.

* Congress included an alternative minimum tax (AMT) patch in the new law.  Under the new law’s patch for the 2008 tax year, the AMT exemption amounts are $69,950 for married couples filing jointly and surviving spouses, $46,200 for single taxpayers and heads of household, and $34,975 for married couples filing separately for 2008.

* The new law extends through December 31, 2009, the above-the-line higher education tuition deduction. The deduction allows eligible taxpayers to deduct the costs of qualified higher education expenses paid during the year for themselves, a spouse, or a dependent.

* The new law extends several energy efficiency and energy property tax incentives.  The Code Sec. 179D deduction for energy efficient commercial buildings is extended through December 31, 2013.  The Code Sec. 25D residential energy efficient property credit is extended through December 31, 2016, along with adding incentives for residential small wind investment and geothermal heat pumps and authorizing taxpayers to use the credit to offset AMT. Congress also reinstated the Code Sec. 25C residential energy property credit for property placed in service in 2009. Additionally, Congress modified the energy efficient appliance credit for manufacturers of qualifying dishwashers, clothes washers, and refrigerators.

Net after tax cost of borrowing

Posted on by Evan in General Mortgage Info., Home Purchase, Personal Finance, Taxes

In Todd Ballenger’s book “Borrow Smart Retire Rich” he trademarks the term ‘EPR’ which stands for Effective Percentage Rate.

This concept it important in making decisions regarding how much a homeowner should borrow.  Here is a simple explanation:

1) First, it’s important to understand that most homeowner’s are able to deduct the interest that they pay on their mortgage from their taxable income to determine their tax liability.

2) Therefore, a homeowner’s interest rate does not truly represent the actual cost of borrowing.  For example, a person who has a mortgage with a 7.00% interest rate and finds themself in a 28% marginal tax bracket will have an EPR of 4.34% (7.00% * (1-.28%)=4.34%).

3) If cash-flow was not an issue this homeowner would be smart to borrow as much money as they could so long as the capital was used to earn a return in excess of 4.34%.

What is ‘Home Acquisition Debt’ and why is it important?

Posted on by Evan in Home Purchase, Personal Finance, Taxes

Do you know what your “acquisition indebtedness” (AKA “home acquisition debt”) is?  You probably do know and don’t even know it.  Your acquisition indebtedness is simply the amount of mortgage you took out to buy your home.

For example, if I buy a home for $300,000 and take out a loan for $240,000 at the time of purchase then my acquisition indebtedness is $240,000.

Why should anyone care?

Acquisition indebtedness is important because it is what the IRS uses to determine how much interest you can deduct from your income to determine your tax liability.  At the time of this writing the IRS would allow a household to deduct the interest expense on their acquisition indebtedness (plus $100,000 if the household does a cash-out refinance after they’ve purchased the home) so long as the loan amount(s) do not exceed $1.0 million.

Therefore, if you purchased your home back in 1980 for $50,000 and took out a $40,000 mortgage then your acquisition indebtedness is only $40,000.  If you have taken cash-out refinances over the past 25 years to fund college educations, debt consolidations, and/ or other objectives along the way without making significant improvements to your home then you may only be able to deduct the interest on first $100,000-$140,000 of your current mortgage.

There are many caveats, conditions, and exceptions to this rule so for details visit this link to go to the IRS website.

There are a few different ways that this tax rule will impact how we advise our clients.  One of the most common is when a client of ours purchases a home for cash.  Once they’ve done so they still have 90 days to establish home acquisition debt by taking out a mortgage on the property.

Once a homeowner’s acquisition indebtedness is paid (partially or entirely) that portion is no longer tax deductible unless the mortgage is used to improve the home OR is within the $100,000 cash-out exception.

Tax implications of capital losses…..

Posted on by Evan in Investing, Personal Finance, Taxes

They say that you learn something everyday and thankfully I came across this article this evening because otherwise this may have been the exception. 

In the Washington Post a reader wrote and posed the question, “Is it time to sell some beaten-down holdings for tax reasons, and how do I decide which ones?”

The reader is alluding to a rule which allows an investor to write realized capital losses against capital gains to offset tax liability.  Here are a few provisions in this rule that I DID NOT know until reading the experts’ responses (which can be viewed at these two links: 1 & 2):

-Capital losses may only be used to offset any and all capital gains in the given year + up to $3,000 of ordinary income.

-Capital losses may used to offset current & future capital gains.  Therefore, if an investor incurs $5,000 in capital losses in a given year and only has $1,000 in capital gains they may use $3,000 to offset ordinary income tax liability and $1,000 of future capital gains.

-Keep in mind the “wash rule” which prevents investors from claiming the loss if the same security is repurchased within 30 days of the sale date in which the loss was realized.

Capital Gains Exclusion for Sale of Primary Residence

Posted on by Evan in For Professionals, Housing & Real Estate, Personal Finance, Taxes

One of the best tax breaks available to homeowners is the capital gains exclusion on the sale of a primary residence.  This important tax benefit is fairly simple yet often misunderstood so I thought I would provide a summary of what the average homeowner should know about.

What is the capital gains exclusion?

The tax code allows home sellers to exclude the first $250,000 for individuals ($500,000 for joint filers) from any capital gain tax liability.

How is a capital gain calculated?

Simply put, a capital gain is equal to the difference between the price a home seller paid for a home and what they sold it for.  For example, a home that was bought for $300,000 and sold for $400,000 would have a $100,000 capital gain.

There are additional items which can go into this calculation such as improvements made to the property during the term of ownership, closing costs, real estate commissions, etc.

Are there any conditions which must be met to qualify for the exclusion?

Yes, a home seller must have lived in the subject property as their primary residence for at least 2 years of the previous 5 years from the date of sale.  For example, if a home seller closes on their home on January 1, 2008 and realizes a $250,000 gain, they must be able to prove that they lived in the property for at least 24 months during the time-frame January 1, 2003-January 1, 2008 in order to qualify for the exclusion.

The tax code only allows tax filers to take advantage of this exclusion once every two years.  For home sales after 2008, there are some additional provisions that impact homeowner’s who used a home as a primary residence AND a rental property within the 5 years of the date of sale.  It is best to check with a tax professional in these instances.

Does a home seller need to “reinvest” the capital gain into a new home in order to qualify for the exclusion?

NO!  This is a commonly held myth that many homeowners believe is the case.  This myth is rooted in the previous tax code which allowed home sellers to exclude their capital gains from tax liability so long as the gain was reinvested into a new home.  This rule was changed with the Taxpayer Relief Act of 1997.  Now homeowners may do whatever they please with their gains.

Can a capital loss from the sale of a primary residence be deducted from a home seller’s taxable income?

Unfortunately not.

Where can I get more information on this topic?

For complete details on this topic I would recommend downloading and reading the IRS publication 523 which deals with selling your home.  You may download this document by clicking this link.

Was this post helpful & informational for you?  Did you find any facts in the article which were incorrect?  Either way please write a comment below so that I can continue to expand “My Mind”.