Tis the Season to Save . . . On Taxes!
Everyone hates paying taxes. We all accept it as inevitable but look for ways to reduce our tax liability. Luckily for us, the IRS offers incentives in the form of tax deductions. Some common deductions include charitable contributions, interest on your home mortgage, and interest on your student loans. While you may have no control on when you pay your mortgage and interest, you do have control on when you make charitable contributions.
Basically we are talking about the time value of money. You get the same tax deduction for your charitable donations whether you make them all in January, throughout the year, or all on December 31. This allows you to use your money throughout the year instead of letting someone else use it.
Some people might want to make charitable deductions but are afraid that if they don’t make them in little contributions throughout the year, the money will be spent come December and they will lose out on the deductions. If you are really serious about making charitable contributions but also not wasting your money, put aside the money you want for charitable contributions each month in a savings account. This allows the money to collect interest, which you can use for yourself, or you can add it to your charitable contributions at the end of the year and get even more tax deductions. Either way, you have the money to make your charitable contributions, you got the value of having the money for the entire year, and you still get your tax deductions.
New Roth IRA Rules Postpone Income Reporting
On January 1, 2010 the rules for converting a retirement account to a Roth IRA are changing. Currently, people can only convert their accounts to a Roth IRA if they have a modified adjusted gross income of $100,000 or less and must not be filing their taxes as married filing separately. Under the new rules, people will be able to convert their other IRAs to a Roth regardless of their income levels. In addition, their is an option that allows report half the income from your conversion in 2011 and the other half in 2012 rather than reporting all of it in the year of conversion as required under the current rules.
Special Tax Treatment for Family Employees
Wages of children under 18 years of age who are employed in the family business are not subject to social security or Medicare taxes. However, this holds true only if the family business is a sole proprietorship or a partnership in which both partners are parents of the children.
If the children are under 21 and perform only domestic services, they are not subject to social security taxes or Medicare taxes. These domestic services must be performed for the parents though and be provided in the parents home only.
In addition to not being responsible for social security and Medicare taxes, the income of children who fall under either of the categories above is not subject to federal unemployment tax. However, this income may still be subject to federal income tax withholding.
Recession over, what now?
People are starting to say that the recession is over, or finishing up. So if it really is over, what should we do with our finances? Even though consumers are starting to spend some money and again feel comfortable with their money, there is still a long way to go before we are at the employment rates we had before this mess started. So how can we keep something like this from happening again?
The first thing that people need to remember and continue working on is maintaining a small savings. Traditionally Americans have not been savers, however, if we had more savings prior to the economic meltdown, the unemployment troubles and foreclosures would not be as bad.
The second thing to consider is divesting their portfolios. Social security isn’t enough for people to retire on, they need money of their own if they are going to live comfortably during retirement unless they plan on working at least part time for their entire life. Thus, the earlier you start saving for retirement the better. IRAs and 401ks are great ways to start saving towards retirement. However, as we have learned from the financial situation these past few years, nothing is sure. Stocks may go up but they may also go down. Thus, you need to put your money not just in stocks, but also have some in bonds, mutual funds, and other investments such as a family home.
Starting your own business? Remember to pay your taxes!
Many small business owners start making a profit, take a salary, and then get a huge surprise when tax day rolls around. Most small business owners do not have a tax or accounting background, however, it is extremely important that you not neglect this side of your business. If as a self-employed person you are not taking employment taxes out of your paycheck each payperiod, you can be in for a shock when you complete your 1040 tax returns.
Employment taxes are actually two parts, the part that the employee sees taken out of his paycheck when he receives it and the part that the employer pays for each of his employees. If a person is considered self-employed, he mush pay both the employer and the employee portion of taxes. At the end of the year when he files his taxes, he will get a credit for a portion of the taxes he paid, however, if he hasn’t been making these payments throughout the year, he will have a huge bill to pay when he files his taxes.
Planning for Retirement
Many people just starting out in the workforce might not be thinking about retirement planning just yet, however, the earlier you start planning and saving for retirement the better off you will be.
Even if you start out putting only a few dollars a week into an IRA or 401k it can still make a difference when compounded over forty or fifty years. The website below allows you to calculate how much you would have when you retire if you put away a certain amount of money each year for retirement. For example, suppose you start with $500 in your retirement account and put in an additional $4,800 a year (only $400 a month) for 40 years. At the end of 40 years when you are ready to retire, the money would grow to $806,000 when you earn an annual interest of 6% on the money.
http://www.moneychimp.com/calculator/compound_interest_calculator.htm
Play around with the calculator and see how much you need to invest each year to have what you think you will need to live on when you retire.
Planning for Retirement
Retirement accounts have been struck particularly hard in the last few decades. First you had the boom of the tech era followed by the crash that started after September 11th. As stocks were bottoming out, people took the money out of stocks and instead started investing it in real estate. Now real estate and stocks are both losing money hand over foot so what should you be doing?
Most employers no longer offer pensions and social security is not enough to live on so how can we prepare for retirement? So how much money will you need?
The first thing to do is to determine where you want to be for retirement. Are you content to live in a condo or small house in the middle of nowhere or do you want to spend your retired days on the beach in Florida or even traveling the world?
Once you know what you want to do during retirement, you need to realistically determine approximately how long you might live after retiring. People are living much longer now so you need to take that into account when determining how much money you will need for retirement.
The third thing you need to consider is whether you will fully retire or do you want to continue working part time while retired as this will affect the money you can expect.
Choosing a Realtor
Looking to sell your property? Finding the right realtor and listening and acting on that realtor’s advice can mean the difference between selling your property within a couple of months despite the down market or having your listing sit on the market for six months to a year.
When looking for a realtor you want to interview a few candidates before choosing one. I know a couple who didn’t do this when they sold some property in Florida a few years ago who ended up paying the realtor a 12% commission because they didn’t know what was reasonable and they hadn’t taken the time to check around.
In addition to checking out at least 3 realtors, you want to consider the realtors ties to your community. Does the person live in the community and have a reputation for honesty? Do they have a lot of contacts that will help them sell your house? Are they experienced? Do they have a website that will feature your house? The biggest issue I have with realtors is getting them to answer the phone or call back when you leave a message. If the realtor isn’t answering the phone for you then they likely aren’t answering the phone when a potential buyer calls either.
You may also want to consider whether the realtor is staying current on trends in housing. The big thing now is staging properties so that they appeal to buyers. This can mean decluttering the house and even doing a few cosmetic repairs before listing it. Is the realtor going to tell you what your house really needs to sell it at the price you want or are they too afraid of upsetting you. Remember, while the house was once your home, now that you are selling it, you should treat it like a business asset. Don’t get emotionally involved.
Using a reverse mortgage to supplement income
As IRAs, 401ks and other retirement accounts have lost value due to the financial decline of the recent years, many seniors have lost a chunk of their retirement income. Thus, their accounts and assets are worth less but their living expenses have not decreased. This is a problem.
Many retirees spend the winter in Florida and then summer in other areas. While this was great in the past, due to their loss of income, it might not be feasible for them to continue this lifestyle right now. They can try to rent out their properties in Florida to supplement their income. They can also try to sell the properties, but don’t expect to get much for them due to the glut of foreclosures on the market in Florida right now. The other option that seniors can take advantage of is a reverse mortgage.
For the last ten years or so banks in Florida have been touting the benefits of reverse mortgages for seniors. A reverse mortgage allows a senior citizen to take out a mortgage against the value of his home. Unlike a home equity loan, the senior doesn’t have to make monthly payments to pay off the mortgage. Instead, the mortgages are paid off when the senior dies or moves out of the house. At that time the house is sold and the bank is repaid for the mortgage and any remaining proceeds from the sale go to the senior or his estate. This gives the senior money now that he needs to live off and allows for it to be paid back at his death.
There is a concern that banks might not be interested in these types of loans right now as housing prices are falling. They might be worried that the house won’t cover the cost of the mortgage at the senior’s death. However, these mortgages are backed by the government. In addition, Congress increased the amount that can be borrowed from a house from $417,000 to $625,000 this year. Another great feature of these loans is that the fees banks can charge are capped by the government. All in all, these mortgages can offer seniors another option to supplement their income if they need additional help.
Purchase a timeshare in Florida or a condo?
Even in this down economy timeshare sales in Florida are bustling. But are they a good deal? It really depends on what you want to do and which company you go with.
I recently attended a couple of timeshare presentations in New Smyrna Beach and Orlando, Florida and while the salespeople made a strong argument, my husband and I decided that timeshares weren’t for us. After all, why should we spend $29,000 to own a two bedroom apartment for one week a year when for $24,000 I can purchase a one-bedroom condo in Orlando right now. That’s right, for less than a timeshare you can purchase a condo in Orlando and use it whenever you want 365 days a year.
However, while that works better for my husband and I it might not be the best option for everyone. For example, if you have a large family that you travel with, a timeshare might be better as it would allow you to choose where you want to spend your vacation and you can trade your week in the condo you purchased for a week somewhere else in a larger condo if you need. However, one downside to timeshares that you need to remember is resale. They are not the easiest things to sell once you have purchased them. In addition, just like a regular condo purchase, you will have maintenance fees for the entire time you own the unit, even though the unit is totally paid for.
There are plenty of things to consider when looking to purchase something to use for vacations. If it will be considered a second home you can get tax credit for the interest you pay on your loan as well as the taxes you pay on the property regardless of whether you pick a timeshare or condo. In addition, you need to consider what to do with your property when you can’t use it.
Now is a great time to purchase a timeshare or vacation condo, just do some homwork first to determine which option is right for you.