Renting may be smarter if home prices in your area will fall further.
More from Kiplinger.com
If you're a renter, you may be champing at the bit to buy a house after watching prices fall for four years. Is it time to jump? It may well be, especially if you want to capture the home buyer's tax credit (you'll need to have a contract by April 30 and close by June 30). But before you leap, you need to go beyond calculating the impact on your monthly budget and figure out how much home-price froth is left in your local housing market.
Bubble Zone
The price-rent ratio -- a city's median home price divided by median annual rent -- is one sign of how stable home prices are likely to be. We have included the average monthly mortgage payment (based on a 10 percent down payment and 5.3 percent interest rate for a 30-year fixed-rate mortgage) and median apartment rent.
Most Stable
Metro Area Price Rent Ratio Monthly Mortgage Payment Apartment Rent
Cleveland, Ohio 12 $788 $696
Detroit, Michigan 13 $762 $757
Tampa, Fla. 14 $909 $776
Indianapolis, Ind. 14 $828 $628
Atlanta, Ga. 14 $823 $756
Inland Empire, Cal. 15 $1,057 $996
Las Vegas, Nevada 15 $916
$795
St. Louis, Mo. 15 $891
$682
Cincinnati, Ohio 15 $892
$667
Jacksonville, Fla. 15 $1,028
$758
Least Stable
Metro Area Price Rent Ratio Monthly Mortgage Payment Apartment Rent
Oakland, Cal. 34 $2,934 $1,233
San Jose, Cal.
34 $3,428 $1,449
San Francisco, Cal.
30 $3,736 $1,732
Orange Cty., Cal.
29 $3,128 $1,444
Seattle, Wash.
29 $2,147 $926
Salt Lake City, Utah
27 $1,296 $694
New York, New York 27 $7,083
$3,327
Portland, Ore.
26 $1,627
$762
San Diego, Cal.
26 $2,263
$1,278
Tuscon, Ariz. 25 $1,122
$604
Encouraging signs
A key number to consider when switching from renter to homeowner is the price-rent ratio. This figure compares a city's median home price with its median annual rent. At the housing market's peak in 2005, the national median home price had inflated to nearly 21 times the median annual rent. By the third quarter of 2009, however, the ratio had deflated to 15, returning to the historical norm, according to Hessam Nadji, managing director of Marcus & Millichap, a commercial real estate brokerage company in Encino, Cal.
If the price-rent ratio where you're looking to buy is 18 or higher, your market may still be in the bubble zone, with a greater probability that home prices will fall after you buy. That could put you underwater -- meaning your home would be worth less than what you owe on the mortgage. If the ratio has fallen below 15, there's less chance that home prices will sink.
The table on Rent or Buy above shows the ten cities in which home prices are least likely to drop further, as well as those most likely to fall further, based on price-rent ratios. We also show the gap between median monthly apartment rents and median monthly mortgage payments. Five years ago, the difference between monthly mortgage payments and rent was $745 nationally; by the end of 2009, it was just $181.
To get a rough estimate of your local price-rent ratio, divide the average list price of several homes that meet your criteria by the average annual rent of several rental units with the same number of bedrooms and comparable amenities.
Weighing the decision
A year ago, the price-rent ratio in Phoenix was 14 -- down from almost 19 a year earlier. Home prices had fallen by half, and mortgage rates were at historic lows. Financial planner Brendan McNamar decided it was finally time for him to buy. He had rented since moving to the city in 2006, just after the housing bubble peaked, and was sitting on a nice nest egg from a home he had sold in 2004.
McNamar shopped for a long time, made offers on several houses and eventually bought a ten-year-old, four-bedroom, three-bathroom short sale listed for $219,000. (In a short sale, the sellers get permission from the lender to sell for less than the mortgage amount.) The house had sold for $355,000 in 2007. McNamar offered the full price, which the bank eventually accepted after 90 days. He put down 20% and took out a 30-year mortgage with a low fixed rate of 5.25%. He pays $1,176 a month (including taxes and insurance), which is more than twice his former monthly rent of $550. But because he hadn't owned a home in the past three years, he was able to snag the $8,000 first-time home buyer's tax credit.
From an investment perspective, McNamar wanted a house that would allow him to break even or earn a profit if he sold in three years. But given that prices have fallen even further in Phoenix since last spring -- the price-rent ratio is a rough guide, not an infallible one -- he reckons that his break-even point now may be four years away. But it's not a big financial setback to him because he has no plans to move.
Good deals for renters
Renting can be a smart strategy while waiting for this choppy housing market to settle down. Consider Jeremy Portnoff and his wife, Heather, of Edison, N.J. By mid 2009, the median home price in Edison had fallen a healthy 19%, to $317,000, from the market's peak in mid 2006.
The Portnoffs had their heart set on a home with three or four bedrooms to accommodate the family they hope to have, plus an office for Jeremy. The house they could afford was a starter home, probably a small townhouse -- which, on an after-tax basis, they figured would cost them about the same as renting.
But the Portnoffs also figured that if they sold it in three years, real estate commissions would consume any gains they could reasonably expect. Plus, Jeremy believed that the price of their ideal home in that area would continue to decline.
So they took a pass on buying and got a great deal on renting a two-bedroom townhome -- $1,550 a month, $300 less than when they looked at the same development three years before. The couple prudently plan to continue to pay down debt and save for a larger down payment on their next home.
In some markets, rental prices have dropped as supply has increased. By the end of 2009, the vacancy rate nationally had grown to 8.2%, a 30-year high, according to Nadji, of Marcus & Millichap. Meanwhile, rents had fallen 5.8% from the year before.
Markets with the highest vacancy rates include Jacksonville, Fla. (forecast at 14% in 2010), Atlanta, Houston, Las Vegas, Orlando, Phoenix, Tampa and Tucson. Renters in such markets can afford to shop around and negotiate hard. A building's leasing manager may be willing to lower the rent to attract or keep your business.
Nadji expects the vacancy rate nationally to tighten up a bit (to 7.8%) by year-end and start a rapid recovery beginning in 2011, with very strong rent growth between 2011 and 2015. Demographics (five million people will enter the peak renter age range of 20 to 34 over the next decade) and plummeting construction starts in 2009 and 2010 drive his forecast.
Not all cities have an excess of rental units, though. In some large cities, such as New York, downtown Chicago, San Francisco, Los Angeles and Washington, D.C., vacancy rates have remained tight -- and home prices have remained stubbornly high.
Saturday, March 20, 2010
Thursday, March 18, 2010
5 New Rules for a Healthy Credit Score
The rules that credit-card companies have to live by changed dramatically with the enactment of new regulations last month. Now, some of the rules for consumers striving to maintain good credit are changing, too.
For the most part, card holders would still do well to pay on time, keep their balances low and refrain from applying for too many credit cards at once. But some of the old tenets may not always hold up, as credit-card companies continue to adapt to the new environment and look for ways to run their for-profit businesses.
Case in point: Many issuers introduced annual or inactivity fees in the weeks leading to or immediately after the Credit Card Accountability, Responsibility and Disclosure Act went into effect. "Now folks have to decide -- do they want this card badly enough to pay the fee, or do they close it," says Barry Paperno, the consumer operations manager at FICO (FICO). It's a question of more than just losing a credit line. Closing a credit card can have a big impact on one's credit score. That is, unless you do some groundwork in advance.
With the help of some easy -- if often counterintuitive -- steps, you can improve and retain a healthy credit score even in today's fast-changing credit environment. Here are five:
Open More Credit Cards
For years, credit experts warned that opening new credit cards will hurt your credit score -- not to mention enable you to run up huge debts. That's still true: The length of your credit history and new credit make up 15% and 10% of the FICO score, respectively. But with credit issuers lowering credit limits left and right these days, having too few credit cards puts a much more important credit-score component at risk: credit utilization, or how much of your available credit you're using. Credit utilization makes up 30% of your score. "More cards mean more available credit and more options if an issuer decides they don't like you," says John Ulzheimer, president for educational services at Credit.com. Generally, having four or five credit cards is better than having just one or two, he says.
Expanding your credit-card portfolio isn't something you should do tomorrow -- it's a strategy to be executed over time. If you have just two cards, now is the time to open a third. But wait at least six months or a year until you apply for a fourth.
Max Out (Some of) Your Credit Cards
A quirk of credit score math actually makes it advantageous to max out certain cards. How? It's a matter of what the issuer tells the credit bureaus.
Some types of payment cards don't report credit limits to the credit bureaus. They include all charge cards from American Express (AXP) and may include some high-end credit cards that are marketed as having no preset spending limit, such as Visa (V) Signature and MasterCard (MA) World. (These cards have a credit limit, but card holders can exceed it and must pay off the excess in full on their next bill.)
When the FICO scoring system comes across such an account, it will either bypass it for the purpose of calculating credit utilization, or substitute the credit limit value with that of the highest balance on record for the account. The most current FICO scores from TransUnion and Equifax (EFX) bypass charge cards, according to Paperno. So as far as those two bureaus are concerned, your charge card spending will not affect your utilization.
But in cases where the FICO formulas substitute the credit limit value with that of the highest balance, consumers who spend roughly the same amount each month could end up with lower scores than they deserve. The solution: run up a balance that's much higher than usual, and your utilization ratio will improve in the following months, Ulzheimer says, and so will your score. (Just pay off that balance in full the next month to avoid interest charges.) Your score will drop during the month for which your card appears maxed out, so don't execute this strategy if you're shopping for a mortgage or another large loan.
To find out if you have cards that don't report a credit limit, check your credit report. You can order one free report a year from each of the three credit bureaus on AnnualCreditReport.com. Charge cards are typically reported as "open," while other credit-card accounts are reported as "revolving," Paperno says.
Don't Ask for a Lower APR
In the old days, consumers were encouraged to call their credit-card companies and ask for lower interest rates. "There really wasn't a downside to doing that," says Gerri Detweiler, an adviser with Credit.com. "These days, if you call you may trigger an account review." Should that happen -- and if the credit issuer doesn't like what they see -- they may cut your credit limit or actually hike your interest rate. This is where having multiple credit cards may come in handy, Detweiler says. "Don't make that call unless you have a back-up card where you could transfer that balance."
Closed a Card? Don't Pay It Off
Under the old rules, interest-rate hikes applied to your existing balance and future purchases. However, since the enactment of the CARD Act, lenders can apply rate increases only to balances going forward. That said, if you closed an account before the CARD Act to opt out of a rate hike, you may not want to rush paying off every last penny of that balance. In a little-known quirk, FICO counts the credit limits of closed accounts towards utilization ratios only as long as there's a balance on that account. "You may have a $100 balance on a card with a $10,000 limit, and it's doing wonderful things for utilization," Paperno says. "Once you pay that down, that utilization no longer counts toward your credit score." That means your credit score could take a dip because you paid off that balance.
Mix Business and Personal
Before the passage of the CARD Act, credit experts routinely advised business owners to keep business and personal expenses separate: use a business credit card for the business, a consumer credit one for their own expenses. Not any more. The CARD Act doesn't apply to business credit cards, so using a personal card for your business expenses is safer, says Detweiler. On the flip side, that may easily hurt your credit, especially if your business expenses are high. Even if you pay those high balances in full each month, they will be listed on your credit report and you could appear overextended. (Of course, there's no guarantee that this isn't happening to you even if you're still keeping things separate. Some issuers now report business credit card accounts to the consumer credit bureaus.) "There's no easy answer here," Detweiler says.
For the most part, card holders would still do well to pay on time, keep their balances low and refrain from applying for too many credit cards at once. But some of the old tenets may not always hold up, as credit-card companies continue to adapt to the new environment and look for ways to run their for-profit businesses.
Case in point: Many issuers introduced annual or inactivity fees in the weeks leading to or immediately after the Credit Card Accountability, Responsibility and Disclosure Act went into effect. "Now folks have to decide -- do they want this card badly enough to pay the fee, or do they close it," says Barry Paperno, the consumer operations manager at FICO (FICO). It's a question of more than just losing a credit line. Closing a credit card can have a big impact on one's credit score. That is, unless you do some groundwork in advance.
With the help of some easy -- if often counterintuitive -- steps, you can improve and retain a healthy credit score even in today's fast-changing credit environment. Here are five:
Open More Credit Cards
For years, credit experts warned that opening new credit cards will hurt your credit score -- not to mention enable you to run up huge debts. That's still true: The length of your credit history and new credit make up 15% and 10% of the FICO score, respectively. But with credit issuers lowering credit limits left and right these days, having too few credit cards puts a much more important credit-score component at risk: credit utilization, or how much of your available credit you're using. Credit utilization makes up 30% of your score. "More cards mean more available credit and more options if an issuer decides they don't like you," says John Ulzheimer, president for educational services at Credit.com. Generally, having four or five credit cards is better than having just one or two, he says.
Expanding your credit-card portfolio isn't something you should do tomorrow -- it's a strategy to be executed over time. If you have just two cards, now is the time to open a third. But wait at least six months or a year until you apply for a fourth.
Max Out (Some of) Your Credit Cards
A quirk of credit score math actually makes it advantageous to max out certain cards. How? It's a matter of what the issuer tells the credit bureaus.
Some types of payment cards don't report credit limits to the credit bureaus. They include all charge cards from American Express (AXP) and may include some high-end credit cards that are marketed as having no preset spending limit, such as Visa (V) Signature and MasterCard (MA) World. (These cards have a credit limit, but card holders can exceed it and must pay off the excess in full on their next bill.)
When the FICO scoring system comes across such an account, it will either bypass it for the purpose of calculating credit utilization, or substitute the credit limit value with that of the highest balance on record for the account. The most current FICO scores from TransUnion and Equifax (EFX) bypass charge cards, according to Paperno. So as far as those two bureaus are concerned, your charge card spending will not affect your utilization.
But in cases where the FICO formulas substitute the credit limit value with that of the highest balance, consumers who spend roughly the same amount each month could end up with lower scores than they deserve. The solution: run up a balance that's much higher than usual, and your utilization ratio will improve in the following months, Ulzheimer says, and so will your score. (Just pay off that balance in full the next month to avoid interest charges.) Your score will drop during the month for which your card appears maxed out, so don't execute this strategy if you're shopping for a mortgage or another large loan.
To find out if you have cards that don't report a credit limit, check your credit report. You can order one free report a year from each of the three credit bureaus on AnnualCreditReport.com. Charge cards are typically reported as "open," while other credit-card accounts are reported as "revolving," Paperno says.
Don't Ask for a Lower APR
In the old days, consumers were encouraged to call their credit-card companies and ask for lower interest rates. "There really wasn't a downside to doing that," says Gerri Detweiler, an adviser with Credit.com. "These days, if you call you may trigger an account review." Should that happen -- and if the credit issuer doesn't like what they see -- they may cut your credit limit or actually hike your interest rate. This is where having multiple credit cards may come in handy, Detweiler says. "Don't make that call unless you have a back-up card where you could transfer that balance."
Closed a Card? Don't Pay It Off
Under the old rules, interest-rate hikes applied to your existing balance and future purchases. However, since the enactment of the CARD Act, lenders can apply rate increases only to balances going forward. That said, if you closed an account before the CARD Act to opt out of a rate hike, you may not want to rush paying off every last penny of that balance. In a little-known quirk, FICO counts the credit limits of closed accounts towards utilization ratios only as long as there's a balance on that account. "You may have a $100 balance on a card with a $10,000 limit, and it's doing wonderful things for utilization," Paperno says. "Once you pay that down, that utilization no longer counts toward your credit score." That means your credit score could take a dip because you paid off that balance.
Mix Business and Personal
Before the passage of the CARD Act, credit experts routinely advised business owners to keep business and personal expenses separate: use a business credit card for the business, a consumer credit one for their own expenses. Not any more. The CARD Act doesn't apply to business credit cards, so using a personal card for your business expenses is safer, says Detweiler. On the flip side, that may easily hurt your credit, especially if your business expenses are high. Even if you pay those high balances in full each month, they will be listed on your credit report and you could appear overextended. (Of course, there's no guarantee that this isn't happening to you even if you're still keeping things separate. Some issuers now report business credit card accounts to the consumer credit bureaus.) "There's no easy answer here," Detweiler says.
Wednesday, March 17, 2010
Want a Bigger Tax Refund? Don't Itemize
Six reasons why many taxpayers can save money and time by claiming the standard deduction.
Did you know you can legally take a deduction that is more than the total of your receipts? It's called the standard deduction and for a lot of taxpayers it's a money and time saver.
Year after year taxpayers spend hours hunting down and organizing all their receipts and canceled checks for totally legitimate deductions -- gifts to charity, medical expenses, unreimbursed business expenses and so on. Then they're told by their tax professionals, (or discover while using software such as Intuit's TurboTax or H&R Block's At Home) that all their conscientious record keeping is for naught. Those itemized deductions won't be showing up on their tax returns, because they'll get a bigger refund by claiming the "standard deduction."
Often people are left feeling a little cheated and confused by the process. So it helps to understand why you may be better off not itemizing, particularly this year. Here are six reasons:
1. The Standard Deduction Isn't So Small or So Standard
The standard deduction is an amount assigned to each filing status. The base amount for 2009 is $5,700 for a single filer and double that -- $11,400 -- for a married couple filing jointly. A head of household (a single parent with kids, for example) gets a standard deduction of $8,350. There are additions to these standard amounts for those who are blind or over age 65.
In addition, for 2009 filers using the standard deduction can claim some extra breaks, including a $1,000 per couple ($500 for a single) deduction for real estate taxes paid. In fact, there are so many special breaks the Internal Revenue Service created a new tax form this year: Schedule L, Standard Deductions for Certain Filers. You use Schedule L to claim the extra real estate tax deduction, certain casualty losses and a special deduction for sales tax on a new vehicle purchased after Feb. 16, 2009 and before the end of 2009. With such add-ons, the standard deduction can quickly become a large number, and more beneficial than deducting your actual expenses. The common complaint I hear is: "I don't get to take anything anymore." I explain it as "Let's Make A Tax Deal." Behind door No. 1 are all your receipts and behind door No. 2 is the standard deduction. You want to pick the door that will get you a bigger deduction.
2. Medical Expenses Aren't Easy to Deduct
The list of allowed medical deductions is long and includes out-of-pocket expenses such as medical co-pays, dental work, glasses, $0.24 per mile to get to and from medical appointments, nursing home costs, health and long-term care insurance and even the cost of adding a wheelchair ramp to your home. (Note: If you're self-employed, the cost of medical insurance is deductible on more favorable terms on your Schedule C.)
One point of confusion: Many people help pay for their health insurance with pre-tax money taken out of their pay. Even though those insurance premiums are a big and rising expense, they aren't deductible since they come out of untaxed money.
Here's another catch: You can only deduct medical expenses to the extent they exceed 7.5% of your income. So most people, while they may feel their out-of-pocket medical costs are high, will not qualify for much of any medical deduction unless they have a catastrophic illness or a family member in a nursing home.
Let's take the example of Charlotte, a single mom filing as a head of household. Charlotte works in a job with medical insurance and has an adjusted gross income of $42,000, She had out-of-pocket medical expenses totaling $3,300. But only expenses above $3,150 (7.5% of $42,000) are deductible for Charlotte. So she can deduct only $150 in medical expenses. (If she had a medical flexible spending account at work, she could have paid all of her expenses out of that -- pre-tax.)
3. Some Real Estate Taxes Are Deductible Either Way
Yes, real estate taxes on your first and second home are deductible. Charlotte paid real estate taxes of $1,200. That means if she itemizes, she can deduct $1,200. But remember, for 2009, if she claims the standard deduction, she can deduct $500 of that tax anyway.
4. Your Deductible Mortgage Interest Could Be Shrinking
Yes, this can be a big itemized deduction. But as you pay down your mortgage your interest deduction is lower, and that write-off becomes less valuable as an itemized deduction. Moreover, when you refinance to get a lower interest rate, your mortgage deduction also goes down. Note that points you pay on a new mortgage may be deducted in full the year you pay them, but those paid to refinance a mortgage must be deducted over the life of the new loan. Also be aware that closing costs are never deductible on a personal residence, although many of my clients seem to be told otherwise.
5. Charity Requires Record Keeping
You need receipts for any and all donations, including $20 you put in the church collection plate on Sunday. The Internal Revenue Service is serious about the records part, and if you're chosen for one of its "correspondence audits," it will deny charitable deductions you can't substantiate.
You cannot take a deduction for your time, but your travel to perform charitable works is deductible at $0.14 per mile. Back to Charlotte, who keeps fastidious receipts, gives generously and volunteers frequently at her church. Between donations and mileage, her deduction for charitable giving if she itemizes is $2,200.
6. Miscellaneous Deductions Are Deductible, but ...
Various items, including preparation fees, safe deposit box fees, and unreimbursed job related expenses are also deductible -- but like medical deductions, only to the extent that they exceed a certain percentage of your income. For miscellaneous deductions, that is 2%.
Charlotte paid $195 to have her taxes done, $30 for a safety deposit box and $560 in job search expenses. Her total is $785, but only amounts above $840 (2% of $42,000) are deductible. So she can't claim any miscellaneous itemized deductions.
Let's recap. Charlotte's allowed deductions, if she itemizes are: real estate taxes, $1,200; sales tax on a car $650; state and local income tax withholding from her pay, $1,100; medical expenses, $150; mortgage interest, $3,000; charity, $2,200. Grand total: $8,300. (Normally, you can deduct either state and local sales taxes or income taxes, but the car provision is an extra for 2009 that can be claimed in addition to state and local income taxes.)
Charlotte's standard deduction, as figured on Schedule L, is $8,350 for head of household status, $650 for the car taxes and $500 for real state taxes. Grand total: $9,500. So she, like many filers, receives of a larger tax break by not itemizing.
In some cases, whether itemizing saves you money will vary from year to year. But the point is this: Don't assume you're being deprived of some benefit if your tax preparer or your tax software tells you to take the standard deduction.
Cheryl Morse has been an enrolled agent specializing in individual and small-business taxes for more than 25 years and is a tax manager with Emerging Business Partners in eastern Massachusetts. She is a national instructor for the National Association of Tax Professionals, an instructor for the University of Massachusetts Tax School and area chair of the IRS Taxpayer Advocacy Panel.
Copyrighted, Forbes.com. All rights reserved.
Did you know you can legally take a deduction that is more than the total of your receipts? It's called the standard deduction and for a lot of taxpayers it's a money and time saver.
Year after year taxpayers spend hours hunting down and organizing all their receipts and canceled checks for totally legitimate deductions -- gifts to charity, medical expenses, unreimbursed business expenses and so on. Then they're told by their tax professionals, (or discover while using software such as Intuit's TurboTax or H&R Block's At Home) that all their conscientious record keeping is for naught. Those itemized deductions won't be showing up on their tax returns, because they'll get a bigger refund by claiming the "standard deduction."
Often people are left feeling a little cheated and confused by the process. So it helps to understand why you may be better off not itemizing, particularly this year. Here are six reasons:
1. The Standard Deduction Isn't So Small or So Standard
The standard deduction is an amount assigned to each filing status. The base amount for 2009 is $5,700 for a single filer and double that -- $11,400 -- for a married couple filing jointly. A head of household (a single parent with kids, for example) gets a standard deduction of $8,350. There are additions to these standard amounts for those who are blind or over age 65.
In addition, for 2009 filers using the standard deduction can claim some extra breaks, including a $1,000 per couple ($500 for a single) deduction for real estate taxes paid. In fact, there are so many special breaks the Internal Revenue Service created a new tax form this year: Schedule L, Standard Deductions for Certain Filers. You use Schedule L to claim the extra real estate tax deduction, certain casualty losses and a special deduction for sales tax on a new vehicle purchased after Feb. 16, 2009 and before the end of 2009. With such add-ons, the standard deduction can quickly become a large number, and more beneficial than deducting your actual expenses. The common complaint I hear is: "I don't get to take anything anymore." I explain it as "Let's Make A Tax Deal." Behind door No. 1 are all your receipts and behind door No. 2 is the standard deduction. You want to pick the door that will get you a bigger deduction.
2. Medical Expenses Aren't Easy to Deduct
The list of allowed medical deductions is long and includes out-of-pocket expenses such as medical co-pays, dental work, glasses, $0.24 per mile to get to and from medical appointments, nursing home costs, health and long-term care insurance and even the cost of adding a wheelchair ramp to your home. (Note: If you're self-employed, the cost of medical insurance is deductible on more favorable terms on your Schedule C.)
One point of confusion: Many people help pay for their health insurance with pre-tax money taken out of their pay. Even though those insurance premiums are a big and rising expense, they aren't deductible since they come out of untaxed money.
Here's another catch: You can only deduct medical expenses to the extent they exceed 7.5% of your income. So most people, while they may feel their out-of-pocket medical costs are high, will not qualify for much of any medical deduction unless they have a catastrophic illness or a family member in a nursing home.
Let's take the example of Charlotte, a single mom filing as a head of household. Charlotte works in a job with medical insurance and has an adjusted gross income of $42,000, She had out-of-pocket medical expenses totaling $3,300. But only expenses above $3,150 (7.5% of $42,000) are deductible for Charlotte. So she can deduct only $150 in medical expenses. (If she had a medical flexible spending account at work, she could have paid all of her expenses out of that -- pre-tax.)
3. Some Real Estate Taxes Are Deductible Either Way
Yes, real estate taxes on your first and second home are deductible. Charlotte paid real estate taxes of $1,200. That means if she itemizes, she can deduct $1,200. But remember, for 2009, if she claims the standard deduction, she can deduct $500 of that tax anyway.
4. Your Deductible Mortgage Interest Could Be Shrinking
Yes, this can be a big itemized deduction. But as you pay down your mortgage your interest deduction is lower, and that write-off becomes less valuable as an itemized deduction. Moreover, when you refinance to get a lower interest rate, your mortgage deduction also goes down. Note that points you pay on a new mortgage may be deducted in full the year you pay them, but those paid to refinance a mortgage must be deducted over the life of the new loan. Also be aware that closing costs are never deductible on a personal residence, although many of my clients seem to be told otherwise.
5. Charity Requires Record Keeping
You need receipts for any and all donations, including $20 you put in the church collection plate on Sunday. The Internal Revenue Service is serious about the records part, and if you're chosen for one of its "correspondence audits," it will deny charitable deductions you can't substantiate.
You cannot take a deduction for your time, but your travel to perform charitable works is deductible at $0.14 per mile. Back to Charlotte, who keeps fastidious receipts, gives generously and volunteers frequently at her church. Between donations and mileage, her deduction for charitable giving if she itemizes is $2,200.
6. Miscellaneous Deductions Are Deductible, but ...
Various items, including preparation fees, safe deposit box fees, and unreimbursed job related expenses are also deductible -- but like medical deductions, only to the extent that they exceed a certain percentage of your income. For miscellaneous deductions, that is 2%.
Charlotte paid $195 to have her taxes done, $30 for a safety deposit box and $560 in job search expenses. Her total is $785, but only amounts above $840 (2% of $42,000) are deductible. So she can't claim any miscellaneous itemized deductions.
Let's recap. Charlotte's allowed deductions, if she itemizes are: real estate taxes, $1,200; sales tax on a car $650; state and local income tax withholding from her pay, $1,100; medical expenses, $150; mortgage interest, $3,000; charity, $2,200. Grand total: $8,300. (Normally, you can deduct either state and local sales taxes or income taxes, but the car provision is an extra for 2009 that can be claimed in addition to state and local income taxes.)
Charlotte's standard deduction, as figured on Schedule L, is $8,350 for head of household status, $650 for the car taxes and $500 for real state taxes. Grand total: $9,500. So she, like many filers, receives of a larger tax break by not itemizing.
In some cases, whether itemizing saves you money will vary from year to year. But the point is this: Don't assume you're being deprived of some benefit if your tax preparer or your tax software tells you to take the standard deduction.
Cheryl Morse has been an enrolled agent specializing in individual and small-business taxes for more than 25 years and is a tax manager with Emerging Business Partners in eastern Massachusetts. She is a national instructor for the National Association of Tax Professionals, an instructor for the University of Massachusetts Tax School and area chair of the IRS Taxpayer Advocacy Panel.
Copyrighted, Forbes.com. All rights reserved.
Wednesday, March 3, 2010
The 5 foods you should eat every day
Eating right on a budget can be a challenge, but it's certainly not impossible. Consider this your cheat sheet to the 5 inexpensive foods you should eat everyday for optimum health.
#1 Leafy greens
Medical experts call them one of nature's miracle foods. Leafy greens like Swiss chard and kale are high in nutrients like folate and vitamins A and C that can lower your risk of cancer. Just one cup of dark, leafy greens a day could also prevent diabetes and high blood pressure.
#2 Nuts
Many nutritionists recommend nuts like almonds, cashews and walnuts because they're high in natural fiber. Fiber slows your digestive process, keeping hunger and unhealthy mid-afternoon snacks at bay. Goodbye vending machine runs!
#3 Onions
Studies show that consuming onions on a regular basis may reduce symptoms of asthma and the risk of developing stomach cancer. Add them to soups and stir-fry, and just remember -- the stronger the onion, the greater the health benefit.
#4 Whole grains
Refined grains, like white rice and pasta, have lost 90% of their nutritional value through the refining process. As if that weren't reason enough to choose whole grains like brown rice, quinoa and whole oats, a recent study showed that a diet rich in whole grains actually flattens your belly by reducing fat storage in your lower abdominal region.
#5 Yogurt
Making yogurt part of your daily eating routine can improve your digestion -- if you're buying the right stuff. Check that the label lists "active cultures" to make sure you're getting healthy probiotics, and pick a yogurt rich in vitamin D to prevent osteoporosis.
#1 Leafy greens
Medical experts call them one of nature's miracle foods. Leafy greens like Swiss chard and kale are high in nutrients like folate and vitamins A and C that can lower your risk of cancer. Just one cup of dark, leafy greens a day could also prevent diabetes and high blood pressure.
#2 Nuts
Many nutritionists recommend nuts like almonds, cashews and walnuts because they're high in natural fiber. Fiber slows your digestive process, keeping hunger and unhealthy mid-afternoon snacks at bay. Goodbye vending machine runs!
#3 Onions
Studies show that consuming onions on a regular basis may reduce symptoms of asthma and the risk of developing stomach cancer. Add them to soups and stir-fry, and just remember -- the stronger the onion, the greater the health benefit.
#4 Whole grains
Refined grains, like white rice and pasta, have lost 90% of their nutritional value through the refining process. As if that weren't reason enough to choose whole grains like brown rice, quinoa and whole oats, a recent study showed that a diet rich in whole grains actually flattens your belly by reducing fat storage in your lower abdominal region.
#5 Yogurt
Making yogurt part of your daily eating routine can improve your digestion -- if you're buying the right stuff. Check that the label lists "active cultures" to make sure you're getting healthy probiotics, and pick a yogurt rich in vitamin D to prevent osteoporosis.
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