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THERE'S NO PLACE LIKE HOME
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
$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
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
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.
CHECKLIST TO CUT YOUR TAXES
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
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.
TAX AND FINANCIAL PLANNING CALENDAR FOR
Saving and Investing
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.
- 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
- 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
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.
copyright - 2005 - The MDTAXES Network
Tax and financial planning calendar for December, 2005
our CPAs everyday on
The MDTAXES Message Board
Join our Live Tax Chat on the first Wednesday of each month at 9 pm
You're Invited to Attend Our Complimentary Presentation
Tax and Basic Financial Planning
Issues Applicable to Young Health Care Professionals
Various members of The
will be hosting a complimentary presentation on the tax
and basic financial planning issues that affect you and your
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.