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Interest Rates Set To Rise On July 1st
Andrew D. Schwartz, CPA
Last month, Congress passed the Deficit Reduction Act
of 2005, which includes a provision dramatically cutting the amount of the
government's student loan package by $13 billion. This change affects
anyone who will take out student loans in the future, as well as those
who have student loans outstanding but haven't yet consolidated them.
Since these cuts reduce subsidies available to
student loan lenders, interest rates are on the rise.
Effective July 1st, the rate for Stafford Loans jumps from 4.7% to 6.8%, and
the fixed rate on PLUS loans increases to 8.5% from as low as 6.1%.
There are quite a few changes to the loan
consolidation rules as well. Not only will rates increase substantially on
July 1st, you'll no longer be able to include certain types of student
loans, including Direct Loans and FFELPS, when you consolidate.
Student Loan Strategies
If you currently have outstanding student loan debt,
now is the time to assess your student loan portfolio and consider the
options available to you through June 30th, including consolidation. A good source of information is
Sallie Mae and
Consolidating generally makes sense for people with
student loans. When you consolidate, you reduce the number of loans
outstanding and the number of payments you need to make each month, making
it easier for you to manage your student loan portfolio. You can also take
advantage of desirable options that reward you with a lower interest rate
for making your monthly payments automatically and consistently making your
payments on time.
If you currently have a child in college, make sure to
complete the FAFSA annually, and consider taking out a Stafford Loan each
year. As long as you submit the FAFSA form, you're generally eligible to
borrow $2,625 for your child's freshman year, $3,500 for the sophomore year,
and $5,500 for the final two years. Most students are eligible for a
Stafford Loan (up to a certain limit) regardless of income, and many qualify
for a “subsidized” version of this student loan – meaning the government
pays the interest until the student’s graduation.
One positive outcome of the Deficit Reduction Act of 2005 is that the
maximum Stafford Loan increases from $2,625 to $3,500 for first-year
students and from $3,500 to $4,500 for second-year students, effective July
Saving For A Child's Education
Do you have a child who will attend college in the
future? Rising student loan interest rates provide an extra incentive for
you to save more money towards your child's education.
What is the best way to save for a child's education these days? With all
the options available to you today, it's important to understand the basics:
529 Plans. With these state sponsored
education savings plan, you purchase into a managed investment portfolio
based on when your child will attend college. Amounts contributed grow
tax-deferred, but since the post-2010 rules have not yet been determined,
withdrawals from a 529 Plan to pay for college tuition and fees might end up
being taxed at your child’s rate starting in 2011. For 2006, you can
contribute up to $12,000 per child into a 529 plan. Or, you can make five
years worth of contributions, up to $60,000, all in one year. Just make sure
to file a Gift Tax return (Form 709) electing to spread your 529
contributions over five years.
Pre-paid Tuition Programs. If you’re
concerned that the cost of college will rise quicker than your investment
portfolio, take a look at pre-paid tuition programs. Many states offer these
college savings programs on behalf of colleges and universities within their
state. Or you can check out the
Plan, which is a national pre-paid tuition program representing
approximately 250 schools throughout the country.
Coverdell Education Savings Accounts.
Formerly known as Education IRAs, you can contribute up to $2,000 per
beneficiary per year into an ESA. You’re not allowed to contribute into an
ESA if your adjusted gross income exceeds $220,000 ($110,000 if single).
Amounts contributed grow tax-free, as long as the money is used for your
child's K-12 or college tuition or other allowable education expenses.
Unlike 529 Plans, the tax rules for ESAs won’t change in 2010 when the 2001
Tax Act sunsets.
U.S. Government Bonds. Another way to save
for a child's education is with EE Bonds or I Bonds. Both of these bonds can
be purchased at a bank or from
I-Bonds are currently yielding 6.73%. As long as your child's name isn't on
the bond, the interest isn't taxable to you provided the total bond
proceeds don't exceed the amount spent for tuition and fees. This tax break
has a pretty low phase out - $121,850 for married couples and $76,200 for
single individuals in 2005.
Two Tax Credits. If you're paying for a
child's tuition out of your current earnings, don't overlook the Hope
Scholarship Credit, which saves you up to $1,500 per year in taxes each of
the first two years of college. Another option is the Lifetime Learning
Credit, which saves you up to $2,000 in taxes per year. Both of these
credits phase out this year once your income exceeds $107,000 if married or
$53,000 if single.
Employ Your Child. If you have an
unincorporated business, you can pay your child up to $5,150 (in 2006),
deduct his or her wages, and your child won't pay any income taxes provided
the wages are the only income earned during the year. Wages paid to
your child are also exempt from social security, Medicare, and unemployment
taxes. You can even contribute up to $4,000 from those wages into a Roth IRA
each year, which would be available to pay for your child's college
expenses, fund first time homebuyer costs, or grow tax-free over the next
fifty years or more.
Higher Rates Are Here To Stay
It looks like the days of low interest rates on your
student loans end on July 1st. Consolidating your loans by June 30th, and
taking advantage of the strategies described above to save for your child's
education, can help cushion the blow.
Questions about student loans? Please e-mail us
your questions at
Track Your Professional
Expenses To Save Taxes
Andrew D. Schwartz, CPA
It’s fair to say that everyone wants to save taxes.
One way to cut your tax bill is to deduct your unreimbursed professional
expenses on your tax return. On the surface, these IRS rules are pretty
straightforward. For an expense to be deductible, it must be both
"ordinary" and "necessary" in connection with your profession.
Let's say that you buy a Palm Pilot or PDA that you use
to keep your schedule and your list of contacts. I would say that qualifies
as ordinary and necessary. But what if you go to the Coach Store and
purchase a leather carrying case for your PDA? Even though you might
consider that purchase ordinary and necessary, the IRS would probably
On our site, we've posted a listing of professional expenses commonly
incurred by your colleagues. You might want to keep this information handy
when reviewing your check register and credit card statements searching for
all your deductible professional expenses incurred during the year. A link
to our listing of professional expenses common to people in your profession
is available on our home page.
Set Up A System
Setting up a system to keep track of your professional expenses
throughout the year will save you taxes. Here are a few suggestions:
Use Quicken or Microsoft Money to track all of
your expenditures throughout the year. Both of these personal finance
programs allow you to assign a category for each check written and credit
card purchase made. At the end of the year, simply print out a report that
includes all your professional expenses to deduct on your tax return.
Use a Separate Credit Card For Business Related
Purchases. This allows you to easily compile all your professional
expenses made during the year, since all your deductible expenditures will
be reflected on your 12 credit card bills. Or even better, use a credit
card from one of the companies that sends their customers an annual summary
of their activity for the year.
File Your Receipts In a Folder or Envelope.
At the end of the year, all you need to do is tally up your receipts to
figure out the professional expenses you can deduct.
Download Our Excel Spreadsheet available at our
home page which lets you easily track your professional expenses on a monthly
Deducting Your Professional Expenses
How you deduct your professional expenses depends on
how you are compensated.
- If you’re compensated as an employee (taxes are withheld from
your pay), you’re required to deduct your professional expenses as a
miscellaneous itemized deduction on your Schedule A. To do so, you’ll need to
complete and attach a Form 2106 or 2106-EZ, Un-reimbursed Employee Business
Expense, to your Form 1040. Don’t forget that your miscellaneous itemized
deductions are only allowable to the extent they exceed 2% of your adjusted
gross income. If you're paid as an employee, you're almost always better off
to have your employer pay your professional expenses for you, since they will
be paid with pre-tax dollars.
- If you’re compensated as an independent contractor (NO taxes are
withheld), you’ll deduct your professional expenses directly against your income
on a Schedule C or Schedule C-EZ, Profit or Loss From Business. Here’s where
your professional expenses give you the biggest bang for the buck.
- If you’re compensated as both an employee and an independent contractor,
you’ll need to determine whether to reflect a specific expense on the
Schedule C or the Form 2106. Items specifically related to your income as an
independent contractor, such as malpractice insurance and directly related auto
mileage, will be deducted directly against that income. Other items, such as job
search expenses, which are more closely related to your employment, should be
reflected on the Form 2106.
What does the Alternative Minimum Tax (AMT) have to do
with professional expenses? While professional expenses reported on the
Schedule C are not limited by the AMT, there's a good chance that your
un-reimbursed employee business expenses reported as a miscellaneous
itemized deduction might trigger the AMT - essentially limiting the taxes
To avoid the AMT, either have your employer reimburse you for your
professional expenses, or try to have enough independent contractor income
each year so you can claim them all on your Schedule C.
Avoid the Spend to Deduct Mentality
While keeping track of the money you spend during the year will save you
taxes, spending money for the sole purpose of padding your deductions is
generally never a good idea. As my tax professor told my class on many
occasions, “Don’t let the tail wag the dog” when it comes to deductions.
Tax Breaks For Homeowners Kick In
Andrew D. Schwartz, CPA
The Energy Tax Incentives Act of 2005 was created to offer
Americans tax breaks in 2006 for being energy efficient. So, if you're
environmentally friendly, some of the provisions of this new law will save
you some taxes
Energy Tax Cuts Effective in 2006
Energy Efficient Home Improvements: You can now
qualify for a tax credit equal to 10% of the money spent on the installation
of certain energy efficient improvements to your principal residence,
including insulation and exterior windows, doors, and skylights. You can
also take a tax credit for "qualified energy property" including up to $50
spent on circulating fans, $150 on furnaces or hot water boilers, and $300
on heat pumps, water heaters, and central air conditioning. The credit
applies for purchases made during 2006 and 2007, and is limited to a
lifetime max of $500 per dwelling, with no more than $200 of the credit to
be taken for replacement windows.
Energy Efficient Appliances: The law provides
manufacturers with a tax credit ranging from $50 to $200 per unit for each
energy efficient dishwasher produced in 2006 and 2007, and for each washing
machine and refrigerator produced between 2005 and 2010. If purchasing an
energy efficient appliance is in your plans, make sure the manufacturer
passes this tax savings on to you.
Energy Efficient New Home: Contractors are eligible
for a tax credit of up to $2,000 for each new (or significantly
rehabilitated) home "substantially completed" and sold during 2006 and 2007,
provided the home meets certain energy savings criteria. If you're in the
market for a brand new home, make sure the builder passes this lucrative tax
break on to you.
Energy Efficient Commercial Improvements: If you own
a commercial building or condo, you're eligible to claim an immediate
deduction of up to $1.80 per square foot (versus depreciating the costs
incurred over 39 years) by making major energy saving improvements to your
building's lighting, hot water, and HVAC systems during 2006 and 2007.
Upgrading insulation, metal roofs, and exterior doors and windows also
counts towards this deduction.
There is also a tax credit available to people who purchase
hybrid vehicles. This credit, which replaced the $2,000 "Clean-Fuel"
deduction, ranges from $650 to $3,400, depending on the vehicle, for
purchases made between 2006 and 2010.
There is a catch, however. The allowable credit
decreases once a certain number of each hybrid model is sold each
year. So there is an incentive to purchase your hybrid vehicle early in the
year. The dealer should be able to tell you how much of a tax credit
you'll be eligible to receive.
Tax Simplification Was Thrown Out the Replacement Window
Congress didn't have tax simplification in mind when they
came up with these rules. Even so, there should be enough information
available, especially from manufacturers, retailers, and contractors trying
to get you to purchase products or services from them, that you should be
able to determine when you're eligible for these tax breaks.
TAX AND FINANCIAL PLANNING CALENDAR FOR
Saving and Investing
- For 2005, the standard deduction for a single individual is
$5,000 and for a married couple is $10,000. A person will benefit by
itemizing once allowable deductions exceed the applicable standard deduction.
Itemized deductions include state and local income taxes (or sales taxes), real estate taxes,
mortgage interest, charitable contributions, and unreimbursed employee business
expenses. Check our list of deductible expenses common to healthcare
professionals for more info.
- For 2005,
the personal exemption is $3,200. Individuals will claim a
personal deduction for themselves, their spouse, and their dependents.
- The maximum earnings subject to social security taxes is $94,200
for 2006, up from $90,000 in 2005.
- The standard mileage rate is $.485 per business mile as of
September 1, 2005 (after being $.405 per mile through August 31, 2005), and
will then be $.445 per mile for 2006.
- The maximum annual contribution into a 401(k) plan or a
403(b) plan is $15,000 for 2006.
And if you'll be 50 or older by December 31, 2006, you can contribute an extra
$5,000 into your 401(k) or 403(b) account this year.
- The maximum annual contribution to your IRA is $4,000 for 2005
and 2006. And once you turn 50, you can contribute an extra $500 into your
IRA for 2005 and an extra $1,000 for 2006. You have until April 15, 2006 to make your
2005 IRA contributions.
copyright - 2006 - The MDTAXES Network
Tax and financial planning calendar for March, 2006
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