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Second Annual MDTAXES Conference

We'll be hosting our second annual MDTAXES conference, exclusively for our member CPA firms, in Washington, DC, on Friday, October 17th.  During the conference, we'll focus on various tax and financial planning issues applicable to young health care professionals.

All CPAs who are members of The MDTAXES Network are invited to attend.  For information, please e-mail us at info@mdtaxes.com.

 

 
May, 2003

HOME SWEET HOME

by Andrew D. Schwartz, CPA

Own where you live -- you've probably heard that expression thousands of times.  But what makes home ownership so great?

First off, owning your home saves you taxes.  Unlike rent which isn't tax deductible, paying a mortgage and real estate taxes is deductible on your federal tax return.  Let's say you have a $200,000 mortgage with an interest rate of 6%, and you pay $3,000 in real estate taxes each year.  If you're in the 30% tax bracket, you'll save $4,500 in federal taxes this year.  That's a tax savings of $375 per month.

Home ownership also provides you with a tax-free way to accumulate wealth.  Under the current tax rules, when you sell your principal residence, you won't be taxed on the first $250,000 of appreciation if you're single, or the first $500,000 of appreciation if you're married, as long as certain conditions are met.  So what does that mean to you?  Unless you sell your home for more than $500,000 ($250,000 if you're not married) above what you paid for the home plus improvements, you won't pay a dime in taxes.  And don't forget that the rules changed back in 1997.  You no longer need to roll over the proceeds from the sale of your principal residence into a more expensive home within two years to avoid paying taxes on the gain realized.

When you own a home, you also have a nice hedge against inflation.   Think back to your days as a renter.  How many years can you remember that your landlord didn't increase your rent?  When you own a home, if you have a fixed rate mortgage, your monthly payment remains fixed over the life of the loan.   As inflation causes the price of everything else to increase, it's nice to know that your largest monthly bill will remain constant. 

There are times when owning a home might not make sense.  If you're not sure where you'll be living two or three years down the road, you might be better off remaining a renter for the time being.   That's because the transaction costs of buying and selling a home can be as high as 10% of the cost of the home.  Unless your home appreciates by 10%, you could end up losing money when you sell it to move to a new city.

Is now a good time to buy your first home or to upgrade to a more expensive home?  Interest rates are extremely low, but home prices are generally quite high throughout the U.S.  In the short-term, therefore, you might overpay for a home if there is a correction in the housing market.  In the long-term, however, owning a home (that doesn't break the family budget) is a key ingredient to most people's financial well being. 

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HOW TO AVOID PAYING TAXES WHEN SELLING REAL ESTATE

by Andrew D. Schwartz, CPA

The stock market has done nothing but gone down over the past three years.  And savings accounts and money market funds are currently only yielding about 1% these days.  Both of these factors have contributed to a boom in the real estate sector that has sent prices soaring throughout the U.S.

If you're fortunate enough to own real estate, you're probably sitting on a substantial amount of appreciation.  What happens when you sell your real estate?  How much will you end up paying in taxes on the gains you realize?

If you're selling your principal residence, the rules are quite liberal.  You won't pay any taxes on the first $250,000 of gain if you're single or $500,000 of gain if you're married, as long as certain conditions are met.

When selling rental or business property, however, you're not so lucky.  In fact, the taxes you owe could be substantial.  Not only will you be taxed on the property’s appreciation, you'll also be taxed on the depreciation you claimed over the years.   Let's say that you purchased a building for $390,000 that you owned for 10 years, and can now sell for $780,000.  Assuming you claimed depreciation of $100,000 over the years, you'll owe taxes on a gain of $490,000 ($780,000 - $390,000) + $100,000).

Fortunately, by structuring the sale of your real estate as a “deferred exchange”, you can avoid paying taxes on the gains your realize.  Also known as a "like-kind exchange" or a "1031 exchange", this tax saving opportunity is available only in connection with the sale of investment and business assets.  Vacations homes and other personal-use property don’t qualify.

With a deferred exchange, you'll only pay taxes on the portion of the sales proceeds that either isn't reinvested into a new property or is used to decrease your outstanding mortgage debt. By choosing replacement property that is more expensive than the property you’re selling, you'll generally avoid paying any taxes whatsoever.

The rules for a deferred exchange are quite specific and must be followed very closely for this tax savings strategy to be successful.  Here are the basics:

  • You must use a qualified intermediary, such as an escrow agent or a title company, to facilitate an exchange.  Once you take possession of any money in connection with the sale of the property, you'll be taxed on that amount.  The easiest way to find a qualified intermediary is to search the web, but make sure to check them out very carefully before sending them any money or transferring your property to them.

  • You must name three possible replacement properties within forty-five days of relinquishing your property to the qualified intermediary. For the property to qualify, you must replace real property with real property and personal property with personal property. Replacing a two family house with an apartment building, an office building, or even undeveloped land is okay with the IRS.

  • You must take title of the replacement property within 180 days of relinquishing your property to the intermediary.  With this step, you need to keep an eye on the calendar.  If April 15th falls before the 180-day period has elapsed, make sure to file for an extension of time to file your 1040, unless you will have purchased the replacement property by that date.

While deferred exchanges can be quite complex transactions, taking advantage of this tax savings opportunity could save you thousands of dollars of taxes.  If you plan on selling real estate that you own, make sure to learn more about deferred exchanges before placing that property on the market. 

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WHAT'S NEW WITH THE FICA REFUND?

For more information, go to our February, 2001 Newsletter or read through the IRS' Chief Counsel Advice Memorandum on this issue.

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TAX AND FINANCIAL PLANNING CALENDAR FOR MAY, 2003

Month

Income Taxes

Saving and Investing

May

  • Good time to make semi-annual donation of clothing and household items to charitable organizations

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2002 & 2003 TAX FACTS

  • For 2002, the standard deduction for a single individual is $4,700 and for a married couple is $7,850. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes, real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses. Our February, 1998 newsletter addressed the issue of itemizing your deductions.
  • For 2002, the personal exemption is $3,000. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  • The maximum earnings subject to social security taxes has increased to $87,000 in 2003 from $84,900 in 2002.
  • The standard mileage rate is $.36 per mile for 2003, down from $.365 per mile for 2002. Deducting automobile expenses was addressed in our February, 1996 newsletter .
  • The maximum annual contribution to a 401(k) plan or a 403(b) plan has increased to $12,000 for 2003 from $11,000 in 2002.  And if you'll be 50 or older by December 31, 2002, you can contribute an extra $2,000 into your 401(k) or 403(b) account this year.
  • The maximum annual contribution to your IRA is $3,000 for 2003 and 2002.  And once you turn 50, you can contribute an extra $500 into your IRA this year.

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copyright - 2003 - The MDTAXES Network



Tax and financial planning calendar for May, 2003


The Millionaire Next Door.  Find out the habits of America's wealthy. You'll be surprised at who comprises the bulk of America's millionaires.

Organize Your Finances with Quicken 2001 in a Weekend

Both these books are available at Barnes&Noble.com.



If you have a friend, colleague, or family member who is always bragging about things they have done to cut their taxes, then check out our new gift items with the saying - "Everything is deductible...until you get audited!"


Interact with our CPAs everyday on The MDTAXES Message Board


Join our Live Tax Chat on the first Wednesday of each month at 9 pm (eastern time)


SAVE MONEY BY TAKING ADVANTAGE OF LOW INTEREST RATES

Are you taking advantage of these reduced rates?  Lower rates will help you cut down on the time it takes you to get out of debt by minimizing the interest you pay each month.  Remember, the lower the interest rate, the larger the portion of your monthly payment that will get applied against your outstanding balances.

  • If you're carrying a balance on your credit cards, there are plenty of opportunities available to cut your interest rate.  Check out CardOffers.com to find the best deals available.

  • If you still owe student loans, see how much you'll save by consolidating your loans into one loan with a lower interest rate at FinancialAid.com.

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HAVE YOU CHECKED YOUR CREDIT REPORT LATELY?

You work hard to keep your credit report as clean as possible. Even so, the current credit reporting system allows for incorrect items to appear on your report that could adversely affect your credit score. Make sure that the information on your credit report is accurate by ordering a free copy of your credit report on-line at  OnlineCreditInfo.com or by purchasing a merged credit report reflecting information from all three credit reports at 130secondreport.com.

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