Category: Taxes

Roth 401K: Tax Me Now

Posted on by Evan in Investing, Personal Finance, Taxes

Our company recently changed 401K providers which offered me the opportunity to evaluate not only the standard 401K but also the Roth 401K.  I had read about the Roth 401K back in December of 2007 and was pleased to see that these options were beginning to work their way into employers’ offerings. 

It also created a new decision that I had not encountered before.  Do I invest my 401K contributions into a standard 401K and take the immediate benefit of the income tax deduction? or do I allocate my contributions into Roth 401K where I pay income tax on my contributions but am able to access the money tax-free in retirement? 

After talking with my investment advisor (who I highly recommend- let me know if you’d like his information by emailing me) he convinced me to put a portion of my monthly contribution into each so that I would have two buckets to play with when I hit retirement. 

If you’re coming across a similar decision in the future I’d encourage you to read this article which explains the 401k & the Roth provision as well as talk with your financial advisor. 

Housing bill alters capital gains exclusion…..

Posted on by Evan in General Mortgage Info., Housing & Financial Legislation, Personal Finance, Taxes

I came across this article in the WSJ today and was surprised to see it.  Embedded in the 700-page housing bill that President Bush signed into law was a change to the way the IRS will allow homeowners to exclude capital gains tax for the sale of a primary residence.

Under the previous rules a homeowner could exclude up to $500,000 ($250,000 for an individual) of a capital gain on the sale of their primary residence so long as they lived in the home for 2 of the previous 5 years from the date of sale.

For example, a couple buys a home in Portland for $375,000 on January 1, 2005.  They live in the property for 3 years as their primary residence.  During their time in this home they also buy a vacation property in Bend for $300,000 on January 1, 2007.    On January 1, 2008 they sell their primary residence in Portland for $500,000 ($125,000 gain) and move into their vacation home in Bend and occupy it as their primary residence.  On January 1, 2009 they sell their home in Bend for $500,000 ($200,000 gain).

Under this scenario the couple would be able to exclude the $125,000 capital gain they incurred on January 1, 2008 when sold their home in Portland as well as the $200,000 capital gain which they incurred when they sold their property in Bend on January 1, 2009.  This is known as “house-hopping”.

Under the new law this will no longer be the case.  Because the home in Bend was allocated for 1 year of “non-qualified use” out of 3 they would only be able to exclude 2/3rds of the $200,000 capital gain from tax.  The remaining 1/3rd would be subject to capital gains tax.

For most Americans this change to the capital gains tax exclusion will not have an impact.  However, for many others this is bad news.

Here is another article from Kiplinger’s that is applicable to this subject.

Details on Tax credit for 1st time home-buyers

Posted on by Evan in General Mortgage Info., Housing & Financial Legislation, Housing & Real Estate, Personal Finance, Taxes

Last week President Bush signed the new housing bill into law.  One of the provisions which was included in this bill to help the ailing housing industry is a tax credit for first time home-buyers.  I wanted to take a quick moment to highlight the details for those of you who will qualify for this credit:

*Who qualifies for this credit? Anyone who buys a home from April 9, 2008-June 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 worth up to $7,500 for couples filing jointly or $3,750 for those who file individually.  A tax credit is different from a tax deduction in that it actaully 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.

I referenced this article as well as other resources for my information.  See also-http://www.federalhousingtaxcredit.com/ & http://online.wsj.com/article/SB121885474988146639.html?mod=residential_real_estate