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Please select one of the following articles: The tax benefit of Homeownership
The tax benefit of Homeownership There’s no place like “your” home! Less than 2% of Americans actually own their homes. Meaning 98% of Americans have a “limited” vested interest in their property, sharing ownership rights with the Mortgage Company. This boils down to one startling statistic. Either your housing payments are being used to pay down “your mortgage” - if you are a homeowner. Or your housing payments are being used to pay down someone “else’s mortgage” – if you are a renter. Given the fact that shelter is one of the basic necessities of life. It stands to reason that many of us will have either a long-term or permanent housing expense. One tax strategy that many financial savvy people employ is to convert non-deductible interest expense to deductible interest expense. Housing expenses as a renter are non-deductible whereas housing expenses as a homeowner are deductible. Translation – seek homeownership over renting. It’s the taxable thing to do. Homeownership
represents one of few tax shelters that exist for people who do not have
sophisticated income sources. Below,
we will detail some tax benefits you can take advantage of as homeowners,
homebuyers, and real estate investors. Mortgage
Interest: Subject
to certain limits, the interest you pay on a mortgage that is your primary
residence or second home is deductible. As
long as the mortgage was used to buy, build, or improve your home, interest on
mortgages up to $1 million ($500,000 or less if married filling separately)
dollars is fully deductible. When
you refinance your mortgage, there are certain restrictions on what may be
deducted. Generally, you are allowed
to deduct interest considered “acquisition indebtedness”.
Extra money obtained from the new refinanced mortgage that is not
considered “acquisition indebtedness” may be deductible depending on the use
of the money. Home
Equity Interest: Interest
on home equity loans are deductible up to $100,000.
Interest on a loan amount over and above the market value of the property
is not deductible. Points:
One point is 1% of the loan amount.
For example, if you are paying 1 point on a $100,000 mortgage, 1 point
equals $1,000. Points are also known as loan origination fees and discount
points. Points are considered to be prepaid interest and are deductible.
Points are fully deductible in the year that you are purchasing a house.
Points are also fully deductible on the amount borrowed for home
improvements. The points you pay when you refinance your mortgage are deductible
over the term of the new loan. Real
Estate Taxes:
Taxes assessed on real estate are deductible. Prepayment
Penalty: Some
Mortgage Companies assesses a prepayment penalty if the mortgage is paid off
early. Prepayment penalty fees are
consider prepaid interest and are fully deductible in the year the prepayment
penalty is assessed. Late
Fee Charges: Fees
assessed for late payment of mortgage is deductible in the year fee was
assessed. Deductible
Rental Expenses: Expenses
incurred in the process of renting property such as repairs, advertising,
janitorial and maid service, utilities, fire and liability insurance, taxes, and
interest etc are deductible. Depreciation:
Real Estate
investors are entitled to reduce their tax liability through depreciation or
annual deductions to cover cost of certain capital expenditures such as a new
roof. Depreciation is a deduction that is realized over a period of time. Home
Office Expenses: A
space in your home dedicated as office space can award certain tax deductions. Capital
Gain Exclusion: As
long as you meet certain restrictions, you can realized up to $500,000 ($250,000
if single) on the sale of your home and avoid capital gains taxes.
Penalty-Free
Distribution: Generally
there is a additional tax of 10% if you withdraw from a defined benefit plan
such as a 401k plan or IRA before the age of 59 ½.
However, first-time homebuyers can withdraw from such plans’ penalty
free as long taxpayer use the money to pay qualified cost for the property. These are some of the tax advantages associated with homeownership. It is important to note that taking on expenses for the sole purpose of a tax incentive is foolhardy at best. For no tax incentive will award you a sufficient benefit to cover the interest expense. For example, assuming you’re in the 27% tax bracket. You take on a deductible interest expense in the amount of $1,000. You reap a tax deduction of $270 but you paid $730 in interest expense. Which would you rather have, a $270 deduction or $1,000? It is however prudent to shift non-deductible interest expense to deductible interest expense. In
closing, while shifting non-deductible interest expense to deductible interest
expense is prudent, the ultimate goal should be to eliminate all debt, including
mortgage and become a “True Homeowner”, free of all liens and claims to YOUR
HOME! Written
by Damon Carr
Bankruptcy, the OLD
STIGMA In the early part of the 20th century, credit was a seldom-used instrument. During this time banks were overly conservative and will lend money to a select few. The only form of regular consumer credit was in instances where the grocer or local convenient store would extend credit for food and other household necessities. In these days people generally worked hard, scraped and saved for big-ticket items such as homes, cars, and college. Men generally were the sole income earners while woman cared for the children. Of course in those days homes and brand new cars sold for well under $7,000. During that time period $7,000 was considered an average price. During this same time period bankruptcy was uncommon. Those who did file for bankruptcy protection were often the victims of much insult and humiliation. There was a certain stigma associated with bankruptcy. Credit became popular in the early 1950’s as Government attempted to stimulate the economy after the ill effects of the Great Depression. During this time credit was being extended for houses, cars and education. As the money supply became more and more available, more and more people were able to compete and purchase big-ticket items. Heavy demand because of credit couple with inflation began to send prices on an upward slope. As credit has become readily available and accepted so has bankruptcy. The stigma that at one time was attached to bankruptcy filings has been dismissed. Total personal bankruptcy filings in 1978 were approximately fifty thousand. Only 24-years later 2002, personal bankruptcy filings have reached approximately two million. What is bankruptcy? Bankruptcy is the act of involving the court system to help reduce or eliminate dischargeable debts. When a debt is discharged through the bankruptcy courts, the debtor is relieved of liability. The debt is eliminated and the creditor must settle for whatever payment the court issues. There are four different bankruptcies that exist under the bankruptcy code: Chapter 7 bankruptcy: A chapter 7 bankruptcy allows a debtor to discharge all unsecured debts. Chapter 13 bankruptcy: A chapter 13 bankruptcy allows a debtor through the help of a trustee to establish a payment plan to its various creditors. The debtor is allowed to reorganize their assets and debts. The plan usually lasts from 3-5 years. Upon successful completion of the plan a debtor will be granted the ability to discharge remainder outstanding unsecured debt Chapter 11 bankruptcy: A chapter 11 bankruptcy essentially works the same as a chapter 13 bankruptcy allowing the debtors to reorganize its assets and debts. This plan calls for a repayment plan. The difference being that this type of bankruptcy is for businesses Chapter 12 bankruptcy: A chapter 12 bankruptcy is exclusively for family farmers whose debt falls within certain limits. It works like a chapter 11 and 13 by setting up a payment plan and allows a farmer to reorganize its assets and debts. A bankruptcy will stay on your credit report up to 10 years. If a person files for a chapter 7 bankruptcy and is approved, they cannot apply for another bankruptcy for 6 years post discharged date. Chapter 12,13 and 11 can however be converted to chapter 7 if debtor finds the payment plan to be too much. Life after bankruptcy: It is important post bankruptcy to have learned from the mistakes that lead to bankruptcy. A person who has filed for bankruptcy will want to re-establish their credit by taking on small credit extensions and maintaining clean payments. Lenders tend to want to see a clean payment pattern on all debts post bankruptcy. In general many lenders began to turn a blind eye toward bankruptcy after the second year. More and more lenders turn a blind eye toward bankruptcy after the fourth year. A person who was forced into bankruptcy due to circumstances beyond their control are viewed more favorably than a person who decided to make unwise decisions with their finances and was forced to file for bankruptcy protection. I have advised many people to consider bankruptcy. In each case the debtor had no assets of which they could liquidate nor were they able to take on extra work to increase household income. In these dire cases, the only reasonable way for them to come out of the debt cycle was to seek bankruptcy. One case involved a 71-year old woman that had taken on a lot of debt for her children and grandchildren. Both children and grandchildren did not live up to their promise to the grandmother. This forced the grandmother into a bind. In her case working was not an option and she had no assets. She had grown nervous and frustrated with the frequent calls from the collection companies. In my view the only way out of the hole for this grandmother was bankruptcy. She raised two very common questions. Will a bankruptcy make my credit looks bad? My answer was your credit is already bad. Would the bankruptcy stay on my credit report for 10 years? My answer was realistically speaking, how long due you think it will take you to clear up all the delinquent accounts? In her case bankruptcy would have given a clean start and a peace of mind. I am not an advocate of bankruptcy however I am a realist. In some cases a person’s financial condition can be so ruin that bankruptcy is the only viable alternative. Written by Damon Carr for The New Pittsburgh Courier Damon is a Licensed Mortgage Broker and a Licensed Real Estate Agent. To
learn more about Damon visit the Companies website at www.allcreditexperts.com
or call 412-856-1183
Don’t Bank on
Overtime Income Over the years I
have originated many loans for Borrowers using Overtime Income as effective
income thus, allowing them to qualify for a larger loan.
Recently I have notice that many people consider their overtime income as
actual income. For example: An applicant applied for a mortgage loan over
the Internet. In answering the question about his yearly income, his reply was
$46,000 per year. After talking to
the borrower and probing into his income I learned that his actual income was
$17.31 per hour which totaled $36,000 per year. The other $10,000 was based on overtime income. I highly recommend
that No one should base his or
her budget off of overtime income. Doing so can have a devastating affect on your finances. At
any given time your employer can eliminate your ability to work overtime or life
circumstances can force you to work less hours. Case and point: I talked to lady
a couple of weeks ago that was looking to buy a home. She was a Nurses Assistant
who had been working for her Company for 15 years.
I ask her how much money she made. She
immediately responded $65,000. My
next question was did she receive overtime or bonuses.
She replied that it was already factored into the $65,000.
After probing into her income, I learned that she made $13.00 per hour,
which totaled $27.000 per year. The
remaining $38,000 came from overtime. She
had been working this type of overtime for quite some time.
Naturally she begin to look at it as if she will continue to make $65,000
plus for years to come. Her budget was based on the budget of a person who was
making $65,000 per year. The type
of house she was looking for was based on a person who was making $65,000 per
year. Earlier in the year
this lady had some type of medical condition that forced her out of work for a
couple of months. When she returned
to work, her Doctors placed her on light duty and she can only work 35 hours per
week. As you can imagine, this had
an impact on her finances. But for
some reason she still had the mindset that she could afford a higher priced
home. She assured me that in no
time she would be back to working 70-80 hours per week and that everything will
be ok. I explained to her how Mortgage Lenders evaluate overtime income. How
does Mortgage Lenders evaluate overtime income? When evaluating
income, Mortgage Lenders look for stability and continuity of income. Overtime income can be used if the employer verifies that the
overtime income has been received for the past two years and that in all
probability the overtime income will continue.
In verifying overtime income, lenders average the overtime income over
the last two years. They than look
at the most recent paystub to verify regular receipt of the overtime income and
to verify if the current overtime is consistent with the average overtime income
the previous two years. Annual overtime earnings that are level or increasing
from one year to the next are acceptable. However, if the trend for the overtime
earnings shows a decline, they will not be considered as stable. In the Nurses
Assistant case, she was able to prove previous overtime income.
Due to her medical situation that forced her to cut down on her hours,
her recent paystubs would not justify her continually making the type of money
she had made in the past. As a result, I could not use the overtime income as
effective income. I would be able to document the income and use it as a
compensating factor. I recommended that
she look in the price range based on her actual income because overtime income
is just not guaranteed. I have not
heard from her since. I hope that
everything work out for her. In closing Don’t
Bank on Overtime Income. Save the money instead and use it to purchase expensive
items without accumulating debt. Written by Damon
Carr for The New Pittsburgh Courier Damon is the owner of ACE Financial. He is a Licensed Mortgage Broker and a Licensed Real Estate Agent. He can be reached at 412-856-1183 or visit his website at www.allcreditexperts.com
Get Mortgage Ready Millions
of people will be seeking the coveted title of “Homeowner” this year.
Millions more will think of becoming a homeowner but do to lack of information,
fear of rejection and lack of preparation will fall short of realizing one of
“The American Dreams”. If only there was a way for these would-be homeowners
to turn wishful thinking into realty. Actually
there is. In this article, I hope to
present information that will help you tackle your fears, plan and prepare for
homeownership. Homeownership is the
biggest financial investment most people experience in a lifetime. Homeownership
also represents one of the most emotional roller coaster experiences.
Yes you can own a home – you just need to “Get Mortgage Ready”. Working as a lending officer, I have come to the realization that most people biggest stumbling block in their quest to homeownership is one of two things – lack of cash for down payment and closing cost and/or bruised credit. In an earlier column, I wrote lenders evaluate mainly three areas known as “The 3 C’s of Credit” - character, capacity and collateral. In short character evaluates your wiliness to repay (credit history) and capacity evaluates your ability to repay (income). Collateral evaluates the instrument securing the loan and your liquid assets – home, savings, stocks, bonds etc (things you own that can be sold for cash). From my observation, credit is the biggest component of the three. There is an assortment of mortgage programs that exist. Some don’t require income verification. Some don’t require asset verification. I have yet to come across a program that does not require credit verification. Credit
tips: As
mortgage lenders, mortgage companies are mainly concerned with whether or not
you pay your rent/mortgage payments on time.
To get around this question it is very important that you make rent
payments by check or money order. Rent
receipts from landlords are disputable and often times manipulated.
Rents receipts do not hold weight in the court of Mortgage Underwriting.
Cancelled checks and money order receipts on the other hand are
indisputable proof that rent payments were made. Another source of verification
for rent payments that are acceptable is a payment history on a computer
generated payment ledger provided by a rental agency.
Mortgage Lenders like to see a clean rental payment history over a
12-month period. If you can provide
proof of clean payments over a longer period of time, it will strengthen your
file. I stress the importance of rental payment history because there are
programs available that will turn a blind eye toward consumer credit history and
base its underwriting decision solely on rental payments.
However, to get the most favorable terms and the most attractive interest
rate, a clean rental history and proof that all consumer debts are current is
needed. Below are some tips to help you retain or regain good credit scores: ·
Correct Errors on your credit report ·
Pay off delinquent accounts ·
Pay your bills on time ·
Don’t max out your credit cards (Keeping balances around half or below
the limit will do the trick) ·
Don’t apply for credit to often ( a lot of inquires and new account
can reduce your scores) ·
Don’t have an abundance of open credit cards and installment loans (5
trades is sufficient) ·
Use credit wisely Saving
for down payment tips: People
generally plan to pay more for their mortgage than they pay for rent.
For example, a person may be paying $400 per month in rental payments.
Upon purchasing their home, they are willing to take on a mortgage payment
(including taxes and insurance) of $600 per month.
One tip that I give to my clients is to save the difference (in this
example, $200 per month) up until they close on their new home. Saving the
difference ($200) per month prepares them for their future mortgage payments
plus it helps them to save money for their down payment and closing cost.
There
are many government-sponsored programs and non-profit organizations that offer
closing cost and/or down payment assistants.
Generally speaking, these programs are offered to those whose household
incomes is 80% of the median (average) income or lower.
In Allegheny County the median household income is approximately $36,000.
Those whom household income is approximately $28,800 or lower will qualify for
many of those programs. These
programs still require a clean rental payment history and that all consumer
account be brought current prior to approval.
A
creative financing alternative that is often used by many new homeowners who has
bruised credit and/or insufficient savings for down payments are Land
Installment Contracts, Lease with the option to buy and Seller Financing. These
vehicles will create a vested interest in the property and will reduce or
eliminate the need for down money upon transferring ownership.
I will provide detail on each in an upcoming article.
I will suffice it to say all payments for Land Installment Contracts,
Lease with option to buy and Seller Financing should be paid by check and/or
money orders. Make the necessary spending and saving adjustments that will help you to prepare for homeownership. There is no place like YOUR HOME! Damon is the owner of ACE Financial. He can be reached at 412-856-1183 or visit his website at www.allcreditexperts.com
When is a good time
to refinance your mortgage? Over
the past couple of years interest rates on mortgages have been very attractive.
On the date of this writing, current interest rates are the lowest we
have seen in the past 40-years. The low interest rate environment over the last
3-years sparked a refinance boom. Millions
of people are refinancing their mortgage in an attempt to take advantage of the
lower rates. Perhaps you have been
considering refinancing your mortgage and wondered is now a good time.
It certainly makes economic sense to pay the least amount of interest on
any outstanding loan. However, there
are certain things to weigh before refinancing your mortgage - such as closing
cost, term on existing mortgage, time horizon in the home, prepayment penalty,
equity position etc. Does this
refinance coincide with your short and long-term goals?
Refinancing
is the process of paying off one loan with the proceeds from a new loan, using
the same property as collateral. People refinance their mortgage for different
reasons. Below are reasons for
refinancing and tips to consider prior to refinancing. Rate
and/or Term refinance: Everyone
could stand to save money. A reduction in interest rate and/or reduction in term
of the loan can save you thousands of dollars in interest expenses. A reduced
interest rate will allow more of your mortgage payment to be applied to
principal, saving you money on interest expenses. When you reduce the term on
your mortgage, you shorten the time it will take to payoff your mortgage.
For example, going from a 30-year mortgage to a 15-year mortgage. A
reduced term will save both time and thousands of dollars in interest over the
life of the loan. The ideal
situation would be if you could reduce both the rate and the term on your
mortgage. Rate and Term refinances also involve going from an adjustable rate
mortgage to a fixed rate mortgage. Debt
Consolidation refinance: It
is so easy to get overextended with bills. A reduction in income, a medical
emergency, a birth of a new child, a divorce, and/or a loss of loved ones can
change your financial profile overnight. Millions of people who are faced with
similar challenges utilize the equity in their home to consolidate bills into
one lower monthly payment. A Debt Consolidation Loan could cut your monthly
payment in half, saving you thousands of dollars in interest expenses by
converting high interest rates revolving expenses into a lower tax deductible
fixed expense. It is important to maintain discipline on the accounts that were
consolidated and not run up the balances. A good debt consolidation loan should
include a plan to eliminate debt. Home
Improvement refinance: There
is no place like YOUR HOME! Updating your home to suit your needs and your
desires is what makes your home YOUR PALACE. Updates to your home can also
increase the market value of it. Some updates that give you the biggest bang for
your buck includes updated kitchen, updated bathroom, adding central air,
additional bedrooms and/or bathrooms, adding a garage, adding a fireplace and/or
expansion of square footage. Credit
cleansing refinance: Good
people oftentimes find themselves in bad situations, making it hard for them to
keep up with their monthly payments – causing them to fall behind on various
bills. Many homeowners who have accumulated equity in their home leverage the
equity in their home to payoff delinquent accounts.
This gives them an opportunity to bring accounts current and get back on
track. It is important to learn from past mistakes and adopt habits that will
keep you on track. Cash-out
refinance: Borrowing
money, using your home as collateral is the perhaps the cheapest way to finance.
People often refinance their mortgage and liquidate the equity in their home for
cash to make big-ticket item purchases - such as a new car, vacation, furniture,
and home improvements. Many small
business owners use the cash for working capital. The primary benefit of taping
into the equity of your home Vs other loan types is lower interest rates and the
tax deductibility of interest Deed
Transfer refinance: Blood
relative oftentimes avoid the necessary need for down payment and/or closing
cost by opting to allow relative to take over ownership of home upon satisfying
outstanding liens on the property. The
obvious benefit in this transaction is reduced fees and the keeping the house
remain in the family. Land
Contract/Lease with the option to buy refinance: A Land Contract or Lease with option arrangement establishes a vested
interest in the property. People who purchase their homes by means of a Land
Contract or Lease with the option to buy are generally allow to refinance Vs a
traditional purchase. It is usually required that the buyer has been under the
contract for 12 plus months with a clean rental payment history.
High income earners
have Financial Problems too! Have you ever said
to yourself?
Let’s face it MONEY
makes the world go around. I
personally believe that everyone should aspire to make as much MONEY
as their talents and desire will allow them.
The truth of the matter is that the type of MONEY that you are currently making is not the root cause of your
financial distress. The core of
your financial distress is the MONEY
that you are SPENDING.
Many families are running on the EARN
AND SPEND treadmill. Which means every dollar that you are making is already
accounted for. So payday is no
longer payday it is actually exchange day.
When you receive your paycheck you are basically signing it over to your
creditors. One of the first Mortgage Loans I originated was a guy who was The Vice President of a local Company here in Pittsburgh. For the sake of anonymity we will call him Spencer. Spencer had an annual base salary of $200,000 per year. That equates to $96.15 per hour. In addition to Spencer’s base salary he received additional perks and bonuses that equated to an average of another $50,000.00 per year. Spencer was married. His wife work and she brought in $75,000 per year. This gives them a household income of $325,000.00 per year. (I can work with that J) I think we will all agree that they were making REALLY GOOD MONEY. The reason I chose the name Spencer is because Spencer was a SPENDER. Let me paint a picture for you. If I was to stack his credit cards one on top of the other, his credit cards from the floor up will stand six feet high. These credit cards had a combine balance of approximately $75,000.00 with payments of $2,250 per month. He also had 3 homes. A home here in Pittsburgh, A vacation home in Florida and a Condo in 7 Springs. His mortgage payments on these homes were approximately $7,800 per month. He also had a luxury boat, three luxury cars, and a Harley Davidson motor cycle which hit him for another $2,500 per month. All of the homes, cars and the boat required maintenance. Who knows what that cost? He, his wife, and his children wore expensive clothing. He had a full time nanny for the kids and I would imagine he had professional landscapers handle is yard year round. Spencer called looking to consolidate bills because he realized he had gotten in over his head. Fortunately for Spencer he had accumulated a lot of equity in his home. We were able to use the equity in Spencer’s home. We refinanced his Mortgage and consolidated many of his bills saving him close to $7,000.00 dollars per month. Spencer mentioned during one of our many conversations that he was also going to sell two of his houses, the boat and one of his cars. I think that Spencer learned from this experience that it does not matter how much money you make. If you don’t live below your means or at the least within your means, it can have a devastating effect on your finances. Ironically while
writing this column, I received a call from a lady I did a loan for a couple of
years ago. She sounded very
distraught and her first words were “Hello Damon, I am having financial
problems and I need your help”. I
asked her what was going on and she stated that she is reaching retirement age
(5 more years to work) and she did not know if she was saving enough for
retirement. I told her that
investing is not my area of expertise but I do know enough to point you in the
right direction. After some
probing, I learned that she has been investing $500-$900 dollars per month over
a 19 year period. Her retirement
portfolio equals $300,000. The
$300,000 does not include the Pension and Social Security she will be eligible
for. The only flaw I saw in her plan was the fact that she did not have money
saved in a traditional or money market account which equals 3-months worth of
living expenses for emergency purposes. She
currently had a base salary of $40,000
per year. (Don’t we all wish we
had her financial problem)? She took
advantage of the principles of Live below your means and Pay your self first.
YOU GO GIRL! Written
by Damon
Carr, Owner ACE
Financial Damon
is a Licensed Mortgage Broker and a Licensed Real Estate Agent. To learn more
about Damon visit the Companies website at www.allcreditexperts.com
or call 412-856-1183
Talking taxes For
years I’ve been looking at pictures of the image billed as “Uncle Sam”.
I often wondered why would they refer to him as an Uncle.
The images that I’ve seen suggest that he is not of my genealogy.
I then began to examine the characteristics of “Uncle Sam”.
He’s always around when he learns I have some money. However, he cannot
be found when I am in need of money. Sounds
like a few family members to me;-). Taxes
are one of the most convoluted, ever changing laws that exist. There are various
phase-out clauses for certain deduction, credits and exemptions.
There is certain test to be measured to determine the eligibility of
itemized deduction. Lastly, there are certain rules that may be applicable one
year and eliminated the next. That being said, the help of a knowledgeable tax
advisor can help in the tax planning process. Tax
is an expense levied on income earners for the purpose of funding local,
regional, and national government. Taxes
represent the largest revenue source for the government. This is essentially how
money is raised to run government. We currently pay taxes on earned income to
federal, state and local government. We pay sales taxes on various items we
purchase such as food, clothing, and other necessities. Lastly, we pay property
taxes and school taxes. Taxes
consume a large part of the money we make. We currently operate under a “progressive
tax system”. Meaning our income is
tax at various tax rates, increasing as our income rise to certain levels. This
system was created with the alleged intent of placing the highest tax burden on
the wealthy. However the wealthy hire great advisors who is able to help them
(the wealthy) preserve their income through strategic tax planning which
includes exclusions, credits, deductions, shelters and smart investments -
oftentimes leaving them with a moderate to a non-existent tax liability.
Ironically, from a dollar for dollar comparison, the middle class and the poor
shoulders the larger tax burden for many of us lack the financial wherewithal
and/or the financial savvy to take advantage of many of the common sense tax
strategies that is available to all. We must learn the basic concept of how
taxes work and we must work hard to make our money work for us thus minimizing
our tax bill. Tax
saving tips: It
is important to note that taking on expenses for the sole purpose of a tax incentive is foolhardy at best.
For no tax incentive will award you a sufficient benefit to cover the
interest expense. For example,
assuming you’re in the 27% tax bracket. You
take on a deductible interest expense in the amount of $1,000. You reap a tax
deduction of $270 but you paid $730 in interest expense.
Which would you rather have? It is however prudent to shift
non-deductible interest expense to deductible interest expense. Interest on
personal loans are not tax deductible but interest on home loans, student loans,
and business loans are tax deductible. We often here about young people working
to pay their way through college while utilizing a loan to pay for a car.
If feasible, a more financial savvy approach would be to utilize a loan
to pay for college while working to pay for a car. Other tax saving approaches
would be to utilize home equity loans to pay off personal loans and/or shift
personal expenses to business expenses. A
company sponsored 401K plan or similar retirement plans can help to defer taxes.
Money directed to a 401K plan will not be tax until money is withdrew,
preferably during retirement years, when it’s more likely you will be in a
lower tax bracket. Contribution to IRA’s is deductible and post tax
contributions to Roth IRA’s are generally withdrawn free of taxes.
Learning how and when to defer income, accelerate expenses and shift
expenses from non-deductible expense to deductible expenses is the cornerstone
of effective tax planning. In
2001 President George W. Bush signed into law the Economic Growth and Tax Relief
Reconciliation Act of 2001. This is
the largest overhaul to the tax code in the last 20 years.
This is the one decision President Bush has made that I personally find
favorable. The jury is still out on whether or not our economy will be able to
keep the Act in place considering the threat to Social Security, the 6-trillion
dollar deficit, and the on going war with Iraq.
Various changes to the tax code will be phased in over time. Unless
extended or made permanent into law, all changes under the Act are scheduled to
repel December 31, 2010. From my
observation the various amendments to the tax code promote family, education,
and investing for retirement. Below
are some of the changes, which will be detailed, in the next column: Tax
rebate checks, tax rate reductions, deduction and redemption phase out, child
tax credit, adoption benefit, dependant care credit, marriage penalty relief,
student loan deduction, catch up contributions and more. Written
by Damon Carr Damon is the owner of ACE Financial. He can be reached at 412-856-1183 or visit his website at www.allcreditexperts.com
Are Consumer Credit
Counseling services for you? Have you considered Consumer Credit Counseling because you have gotten into
too much debt? If you are considering Consumer Credit Counseling and you
are seeking to obtain Mortgage Financing to purchase a home or refinance an
existing mortgage, you should understand how Mortgage Lenders review Consumer
Credit Counseling. Many lenders look at the use of Credit Counseling services as similar to a
Chapter 13 bankruptcy, because both can entail a payment plan and re-negotiation
of debt payments. In fact, some people who are using a credit counseling service
do end up filing bankruptcy because they still don't have the income or money
management skills to handle the payments.) So, in some cases use of such a
service can be a negative. About Consumer Credit Counseling: Many people with a lot of debt seek Consumer Credit Counseling for 2 reasons: 1. Some people are not eligible to declare bankruptcy. 2. Others feel that they have a moral obligation to make every effort to pay their debts. Consumer Credit Counseling are usually non-profit credit counseling organizations. They do not lend money to people. Instead they work with the debtor’s creditors to try to work out a reduced payment plan, a consolidation of debt, or a reduction of interest rates or late fees. The goal is to make it possible for the debtor to repay his or her debts over a period of three to five years. The debtor makes a single payment to the counseling service, and the counseling service makes payments to the creditors. It is important to note that Consumer Credit Counseling services were created
by many of the major credit card companies. These major credit card
companies such as Visa, Master Card, Discover and American Express fund
non-profit counseling services by making donations. The creditors realize
that they are better off working with debtors who want to pay them back rather
than making it harder for them to do so. They count on the counseling
services to teach people about debt management and budgeting. Consumer credit counseling services usually work well for the consumer, but
sometimes there are problems. The consumer might be making payments to the
credit counseling service on time, but the service isn't making payments to the
creditors on time. This shows up on the consumer's credit report as late
payments. It is also possible that the credit counseling service is making the
payments on time, but the creditors are not accepting the reduced payment
amounts. This, too, would negatively affect the consumer's credit report. Written by Damon Carr, Owner ACE Financial Damon is a Licensed Mortgage Broker and a Licensed Real Estate Agent. He is versed in Debt Management, Credit Management, Money Management and Real Estate Management. To learn more about Damon visit the Companies website at www.allcreditexperts.com or call 412-856-1183
Pay in 90 days same as CREDIT! At some point in
time you heard one of these advertisement: Pay in 90 days same as cash, zero
interest financing, Buy now, PAY LATER, no finance charges until January etc. (Spoken in my best
Forrest Gump impression) “Moma always said, everything that SHINE isn’t
GOLD.” I recently had a close friend of mine email this question to me. Damon, what do you think about those programs that offer, if you pay in 90 days it is the same as cash. I have used several of those programs before with no problem. My concern now is that I am currently 90 days late one of my bills. How would they view my 90- day late payment? My
answer: First and foremost
the question you may want to ask yourself.
If I am 90 days behind on one of my bills, do I really need to be
considering accumulating more debt? In
reference to your account being 90 days behind. Most lenders value the payment
history on the accounts that are similar to the account that you are applying
for with them. For example, as a Mortgage Company, our biggest concern is
how well do you pay your mortgage/rent on time.
Now let’s assume that you have a clean mortgage payment history and a
poor payment history on 1 or 2 car loans. How
do you think that car lender will evaluate your credit?
If you said that they would have some concern, you guessed right.
The car lender may approve you with a bump in the rate or they may turn
you down altogether. In your case if the 90-day late payment is an isolated incidence and it is out of character with the rest of your payment habits, more than likely they will approve you, with a bump in the rate of course. It will be better for you if you bring the account current prior to applying. About
pay in 90 days same as cash and similar programs: Think about it. In this money driven society, do you really think anybody, more specifically any Company is going to give you or I anything for free? What are the tangible benefits for the Companies offering such a product? Midsize and Large
Companies spend millions upon millions of dollars researching buying habits,
payment habits, average height of a male/female, current trends etc.
These Companies strategically place items that appeal to women on shelves
that are five feet high. Why,
because the average woman is 5’ 5” tall.
Ever wonder why in the check out aisles you see candy, magazines and, gum
etc? Because these are items that
people buy on impulse. Ching..Ching more money for them. I wonder what do they
know about people who purchase items under the arrangement pay in 90 days same
as cash? For starters the concept of pay in 90 days, same as cash is nothing new. Credit Card companies have been offering a similar program for years. If you pay your credit card balance in full in 30 days, you avoid finance charges. Remember that outfit you bought and you promised you would pay it off as soon as you get paid, 10 years later, you are still making payments. The goal with this pay in 90 days same as cash program is to create a flow of traffic in the store. Once they get you in the store, they know that you will more than likely be interested in more than one product. To offset cost, they cushion the prices on the merchandises. More importantly they know that 70% of the people who purchase these items will not pay it off in full in 90 days. They have a clause on these agreements that states if not paid in full in 90 days the interest starts accruing from the day of purchase. The rate on this product if roughly around 24%. They will also try to sale you overpriced insurance to pay off the 24% loan if something was to happen to you. In closing, if you are going to take out a loan, the best loans are those which have a deductible tax incentive such as a mortgage or a student loan or those with a very attractive interest rate. It would be great if you can get both the tax incentive and the low rate. Zero interest would be great, just make sure you pay it off in 90 days. Written by Damon Carr for The New Pittsburgh Courier Damon is the owner of ACE Financial. He can be reached at 412-856-1183 or visit his website at www.allcreditexperts.com
The Four Thieves of
Savings: I will eventually write a column on all four of the aforementioned thieves shedding more detail on each individual one. I wanted to first present all four thieves in a lineup sort to speak so that you can identify which of the culprit/s have been robbing you of your paycheck, thus crippling your ability to save. Debt: Debt is a condition
of owing someone something, usually money.
Debt is considered to be today’s financial cancer.
It is important to note that some financial expert’s state that
borrowing money and securing it with collateral such as a house, car, inventory,
office equipment, accounts receivables or even taking a item to the pawn shop
etc should not be considered debt. There
reasoning is that in the event you default on your loan, the creditor has the
right to seize the collateral, liquidate it (sale it) and recoup some or all of
there money back. So in essence if
the creditor is able to recoup their money back in full from the liquidation,
you are free of the debt. (It never works out that way) The credit grantor that
give unsecured loans such as credit cards, personal loans, some lines of
credits, installment loans and even money borrowed from family and friends is a
much greater risk. For if you
default on this type of loan the creditor grantor has nothing but the court
system issuing a judgment to rely on for payment.
If you ask me a loan rather secured or unsecured is a debt.
Debt is a by-product of the use of credit. Credit has afforded many of us to live a lifestyle well above
our means. Be sure to consider the long-term payment effect on any type of
credit extension. I have
interviewed many families who did not think about the impact their unborn child
would have on their finances. They
went out and purchased big-ticket items prior to the child’s arrival and later
found themselves in a jam. Could
debt be your savings thief and/or your financial cancer? Now that you identified the culprit, give yourself a debt-ectomy. Unplanned
purchases: An unplanned
purchase is the act of going into a store with one thing in mind and coming out
with six things instead. Unplanned
purchases are better known as impulsive shopping or emotional purchases.
Professionals, even store clerks are trained to do what is called
suggestive selling and/or up selling to stimulate shoppers to fall victim to
unplanned purchases. For example:
Do you want fries to go with that shake? The
more trained the professional, the cleverer their tactics are.
Large and small stores strategically place items in certain areas to
stimulate unplanned purchases. Could
unplanned purchases be your savings thief?
Now that you have identified the culprit, make a list when you go to
stores and stick to it. Taxes Tax is an expense
levied on income earners for the purpose of funding local, regional, and
national government. This is
essentially how money is raised to run government. I for one am not against paying taxes but you know what they
say about taxation without representation. I figure if the rich and the
sophisticated use techniques to preserve their income by reducing their tax
liability through exclusions, credits, deductions, shelters and smart
investments, why not the general population.
I will detail what I have learned in an upcoming column, stay tuned.
Could taxes be your savings thief? Now
that you have identified the culprit, make sure you ask your tax advisor to help
you to understand every tax incentive you qualify for. Inflation Inflation is a
general rise in the level of prices. Remember
back in the day when candy bars were a quarter.
Now they cost sixty cents. To
all you cigarette smokers, I know you understand what inflation mean.
Cigarette prices have risen drastically over the last few years. I would
imagine it is probably because they needed to raise money to combat the various
lawsuits from lung cancer. If your
money or income is not growing consistent, better yet above the rate of
inflation, you loose purchasing power. If
you loose purchasing power, you restrict your ability to save.
Could inflation be your savings thief?
Now that you have identified the culprit, make every attempt to keep your
pay raises and your investments consistent with or above the rate of inflation.
The inflation rate has been holding steady right around 3.5% the last
couple of years. Quick not: On the
date of this writing, a traditional savings account is paying you a rate of
around 1.9%. If that is how you
save the bulk of your money, you are loosing purchasing power. Written by Damon
Carr for The New Pittsburgh Courier Damon is the owner of ACE Financial. He can be reached at 412-856-1183 or visit his website at www.allcreditexperts.com
The Social Insecurity System We
look forward to the days when we will not be required to punch the clock on a
daily basis. For many of us, we dream of traveling and spending time with the
family and friends. For many
others, we just want to relax and be comfortable. What will the primary source
of income be for those planning to travel and those who wants to be comfortable?
A vast majority of our society is relying on Social Security to be their
sole source of income or at least their primary source of income.
The Social Security Administration says that Social Security was never
intended to be the sole source of income for retirees.
They say that a comfortable retirement is based on a “three-legged
stool”, Social Security, pensions, and savings.
The Social Security Administration further states that Social Security
should account for only 40% of total retirement income.
How
do you earn credit for Social Security? You
need a total of 40 credits to be eligible for Social Security.
You can earn up to 4 credits per years.
In 2003, an earning of $3560 will award you 4 credits.
Therefore, you will have to work 10-years earning a minimum of $3560
(today’s rate) to be eligible for Social Security.
We currently pay Social Security taxes of 12.4% for Old-Age Survivors,
and Disability Insurance (OASDI) and another 2.9% for Medicare Benefits.
If you are an employee, your employer splits the cost 50-50 with you.
If you are however Self- employed, you are liable for the full cost. In
2003 there is no OASDI tax above an annual income of $87,000.
Medicare Tax has no limit. Upon retirement, a calculation, tabulating
35-years of your highest income years will be used to determine the amount of
Social Security you will receive. If
you do not have 35 working years, zeros will be used to form a 35-year average.
In the past full entitlement was awarded upon reaching the age of 65. You
were eligible for a reduced benefit starting at age 62, with an amount equal to
80% of the full benefit. The age of retirement for full benefits will increase
at the rate of two months a year, starting in the Y2K. It will rise to the age
of 66 for those born between 1943 and 1954, and rise to 67 for those born in
1960 or later. People will still be allowed to take early retirement at 62, but
the benefit will be reduced to 75%, and eventually 70% of the full benefit. Social
Security sends out a Social Security Statement annually approximately 3-months
before your birthday forecasting an estimate of your Social Security Benefit at
retirement age. If you are retiring
in the next 10-years, the Social Security Statement is a close estimation of
what you will receive. If retirement
is post 10-years, it is important that you understand why Social Security
Administration is stressing Social Security should only account for 40% of
retirement income. Why the age for eligibility is being increased and the Social
Security Benefit is being reduced. Finally, why the title of this column is “The
Social Insecurity System”. “The
Social Insecurity System” The
current Social Security is a “pay-as-you-go” system.
Today’s taxpayers pay for the benefit of today’s retirees.
The income generated from today’s taxpayers is sufficient to cover
today’s retirees while providing a surplus. The surplus is invested in a
Social Security “Trust Fund”. The
surplus is gradually decreasing each year. Upon
year 2015 money coming in will no longer be enough to cover money going out to
pay for retirement benefits. To meet obligation the government will have to tap
into the interest generated on the Trust funds to pay for benefits. One problem
that exists is that the federal government has been borrowing from the “Trust
Fund” to cover other operating expenses. They
have been replacing borrowed money in the “Trust Fund with government bonds.
Even with a nearly $6 trillion dollar deficit and no real cash on hand, lets
assume that the government is able to pay principal and interest on the
government bonds. The Social Security “Trust fund” will still be insolvent
by the year 2037. At that time the
money coming in from taxes will only cover about 75% of those who are eligible.
What
happens to those looking to receive a retirement benefit 2037 and beyond?
Inquiring minds have yet to find an answer.
The irony is those of us who are far from retirement age has been tax at
the highest rate ever, will have to wait the longest to receive benefit and will
reap a much lower Social Security benefit than those whom we are supporting
today. That is assuming we reap a Social Security benefit.
There are many proposals under consideration to mitigate the potential
collapse of the Social Security benefit, which includes increase in Social
Security Tax, reducing benefits, and creating a means testing.
The proposed means testing will reduce and/or eliminate Social Security
benefits awarded to higher earners. One final proposal is privatization of
benefits, which will give the individual (us) control to allocate amongst
investments of our choice. The
current dilemma with The Social Insecurity System strengthens our need to create
a Retirement Portfolio. Written by Damon Carr Damon is the owner of ACE Financial. He can be
reached at 412-856-1183 or visit his website at www.allcreditexperts.com
Tips on Credit
Reports These are excerpts taking from “How long does information stay on your credit report?” and “Profiling the credit scoring system”, written by Damon Carr
Here are the factors
that determines your Credit Score broken down broken down by priority:
Bankruptcies,
judgments, collection accounts, and accounts written off as a profit or loss is
an indication of not making timely payments and results in reduced scores. Below are some tips
to help you retain or regain good credit scores:
For more on FICO
Scores visit www.myfico.com
Too much MONTH left at the end of the MONEY? Does this sound familiar? Payday is two weeks away and I only have $50
left. I have to pay for parking, get gas, give the kids money, and get
food for the house. Perhaps something unexpected came up this month that had an impact on your finances. It is important to build an emergency fund for situations like this. As sure as you and I are breathing, we will be faced with some unexpected emergencies from time to time. It is recommended to save 3-6 months worth of living expenses for emergency purposes. If this is something that seems to happen on an ongoing basis it is time to
examine your Financial Profile. Perhaps your expenses exceed your income. The first thing you want to do figure out how much money is coming in (Income) and how much money is going out (Debt and other expenses). When determining how much money is coming in always use you net income (money you receive after taxes and other deductions). To determine how much is going out, you should develop a Spending Record. Your checkbook is one tool you can utilize for your Spending Record. That is assuming that you maintain an accurate checkbook. In addition to your checkbook, you want to keep a daily Spending Journal on every dollar you spend during each day. This includes everything from a pack of gum to lunch at Wendy’s. Take the information from your checkbook and the information from your daily Spending Journal and develop your Spending Record. You want to compile one month worth of spending detail to get a clear picture of your Financial Profile. Do your Spending exceed your net income? Look to see if there are areas
on your Spending Record that you can adjust for example (lunch, lottery,
smoking, snacks, etc) When face with the dilemma of expenses exceeding income, you have one of two chooses: Increase income or Reduce Expenses. Often times there is a combination of both. It is also important to note that when faced with this dilemma it is
important not to accumulate any more debt. Bear in mind that your current
circumstance is temporary. Below are tips on increasing your income and reducing expenses. These
are just ideas to stimulate thought. Let your creative juices flow. Tips on increasing your income
If you are receiving a good tax return ($2,500 or more) at the end of the year, maybe it is time to realize some of that money throughout the year. A change in your W4 form can do the trick. The more people you withhold for on the W4 the less money they take for taxes. This means more money in your paycheck. For example if your return was $4500 last year and assuming nothing has change with your filing status, that is $375 per month gross you could have realized throughout the year. (A Tax advisor should be consulted. You want to ensure you do not withhold for too much and end up owing in taxes.)
You go to work every day and have developed many skills. Why not
utilize those skills to make extra money. For example: If you are an
Administrative Assistant full time, there are many small businesses that can
utilize your services. You can become an Independent Contractor for some
of these companies and offer to do some administrative work. If you are a
Police Officer full time, you can get some work as a security guard at many
places and earn extra money. The list goes on. Who know you
may be an entrepreneur in the making. Other income producing ideas
Tips to reducing your expenses
If you are a Homeowner and you have accumulated some equity in your property, maybe it will benefit you to consolidate bills into one lower payment. If you are not a Homeowner, there are some Companies that will do a bill consolidation. You will not find too many Companies giving you an unsecured loan above $5,000.
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