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If you're a CPA who provides tax planning and preparation services to young healthcare professionals, and youíd like to find out more about The MDTAXES Network, please give us a call at  (800) 471-0045 or e-mail us at info@mdtaxes.com. (Don't forget to include your mailing address.)

 

WHAT'S NEW WITH THE FICA REFUND?

Most recent information issued by the IRS

Check out the memorandum issued by the U.S. District Court in Minneapolis and you'll see that the court found that medical residents and fellows might not be subject to FICA taxes in many instances.

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

 

 


December, 2005

THERE'S NO PLACE LIKE HOME

by Andrew D. Schwartz, CPA

We're all familiar with Dorothy's famous words in the Wizard of Oz, "There's no place like home."  When it comes to financial planning, Dorothy's sentiment rings true. 

Advantages of Home Ownership

First, 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 $400,000 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 $8,100 in federal taxes this year.  That's a tax savings of $675 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. 

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.  It's important to note that the home sale rules changed in 1997 and 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 (including your salary), it's nice to know that your largest monthly bill will remain constant. 

Potential Pitfall

There are times when owning a home might not make sense.  If you're not sure where you'll be living in two or three years, you might be better off remaining a renter for now.   With the transaction costs of buying and selling a home 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?  While interest rates are still pretty low (but apparently on the rise), 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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CHECKLIST TO CUT YOUR TAXES

by Andrew D. Schwartz, CPA

It's not too late to cut your 2005 tax bill.  Prior to December 31st:

  • Increase your 401(k) and 403(b) contributions if you haven't been contributing at the maximum rate all year.  This year you can put up to $14,000 into your 401(k) or 403(b) plan.  If youíre self-employed, consider setting up a Solo 401(k) by 12/31.  Contributing to a 401(k) or 403(b) plan at work is one of the best tax shelters available to you during your working years.

  • Take a look at your withholding and instruct your employer to withhold additional taxes if you havenít had enough taxes withheld during the year to avoid getting hit with an underpayment penalty.

  • Consider selling your investments held in non-retirement accounts that have decreased in value since your capital losses can offset other capital gains realized during the year (including from your mutual funds).  Excess losses can then be used to offset up to $3,000 of wages and other income.  Make sure to wait at least 31 days before buying back a security sold at a loss, or the IRS will disallow the loss under the "wash sale" rules.

  • Send in your January, 2006 mortgage payment early enough so it will be processed prior to 12/31/05.  By sending in your payment a few weeks early, you can deduct the interest portion of that payment a full year earlier.

  • Clean out your closets and donate your clothing and household items to a charitable organization, since "non-cash" contributions are deductible if you itemize.  Donít forget to get a receipt.  For gifts of money, making your donation by credit card before December 31st allows you to deduct the donation on this year's return, even if you don't pay your credit card bill until 2006.  And you always have the option of donating appreciated investments to charities. You get to claim your donation based on the value of the assets donated, without paying any capital gains taxes on the appreciation.

  • Pre-pay your projected state tax shortfall if you'll be itemizing your deductions and not subject to the alternative minimum tax.

  • Pay off your medical bills if your total medical expenses exceed 7.5% of your income and you itemize.

  • Evaluate whether you'll save any taxes by postponing 2005 income or deductions into 2006 or by accelerating 2006 income or deductions into 2005.

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TAX AND FINANCIAL PLANNING CALENDAR FOR DECEMBER, 2005

Month

Income Taxes

Saving and Investing

 

 

December

  • 4th quarter state estimates should be paid by 12/31 for people who itemize their deductions and won't be hit by the AMT.

  • Keogh plans and Solo 401(k)'s must be established by 12/31

  • 529 Plans must be funded by 12/31 to take full advantage of this year's gift limit of $11,000.

  • Last chance to maximize annual contribution to your 401(k) or 403(b) plan of up to $14,000.

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2005 & 2006 TAX FACTS

  • 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. Our March, 1998 newsletter  explains itemizing your deductions.
  • For 2004, the personal exemption is $3,100. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  • The maximum earnings subject to social security taxes is $90,000 for 2005, and increases to $94,200 in 2006.
  • The standard mileage rate is $.485 per business mile as of September 1, 2005 (after being $.405 per mile through August 31, 2005), up from $.375 per mile for 2004. Deducting automobile expenses was addressed in our March, 1996 newsletter .
  • The maximum annual contribution into a 401(k) plan or a 403(b) plan is $14,000 for 2005.  And if you'll be 50 or older by December 31, 2005, you can contribute an extra $4,000 into your 401(k) or 403(b) account this year.  The maximum annual contribution increases to $15,000 ($20,000 if 50 or older) in 2006.
  • The maximum annual contribution to your IRA is $4,000 for 2005.  And once you turn 50, you can contribute an extra $500 into your IRA this year.  You have until April 15, 2006 to make your 2005 IRA contributions. 

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copyright - 2005 - The MDTAXES Network

 


Looking for a Lawyer or a Financial Advisor?

Check out our Directory of Lawyers to find an attorney familiar with the issues that affect you and your colleagues, and our Directory of Financial Advisors to find an experienced professional who can help.
 


Tax and financial planning calendar for December, 2005


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)


 


You're Invited to Attend Our Complimentary Presentation

on

Tax and Basic Financial Planning Issues Applicable to Young Health Care Professionals

Various members of The MDTAXES Network will be hosting a  complimentary presentation on the tax and basic financial planning issues that affect you and your colleagues. 

The presentation will focus on the tax issues surrounding moonlighting and deducting professional expenses. 

Here is a list of cities where the presentation will be held:

Boston - 1/31/06
 

For more information, click on the name of the city to send the CPA an e-mail.
 



The MDTAXES Network   (800) 471-0045 ~ fax (800) 547-3366    Email us at cpa@mdtaxes.com