12 Tax jokes

1) When you do a good deed, get a receipt in case Heaven is like the IRS.

2) Doing your own income tax return is a lot like a do-it-yourself mugging.

3) A political promise today means another tax tomorrow.

3) Q: Ever wonder why the IRS calls it Form 1040?
A: Because for every $50 that you earn, you get $10 and they get $40.

4) Income tax forms should be printed on Kleenex because so many of us have to pay through the nose.

5) Isn't it appropriate that the month when the taxes are due begins with April Fool's Day and ends with cries of "May Day!"?

6) Why does a slight tax increase cost you two hundred dollars and a substantial tax cut save you thirty cents?

7) America is the land of opportunity. Everyone can become a taxpayer.

8) The latest income-tax form has been greatly simplified. It consists of only three parts:
1. How much did you make last year?
2. How much do you have left?
3. Send amount listed in part 2.


9) Q: What do accountants suffer from that ordinary people don't?
A: Depreciation.

10) Whomever said that truth never hurts never had to fill out a Form 1040.

11) Drive carefully.
Uncle Sam needs every taxpayer he can get.

12) Q: Why is a tax loophole like a good parking spot?
A: As soon as you see one, it's gone.

USD the history of Dollar

USD the history of Dollar

Interesting Facts And Confusing Thoughts About The American Poor

Just came across some interesting numbers on American poverty, through this report: “Understanding Poverty in America“. In the write-up below, I am presenting some interesting highlights from the 2004 report (which is based on the Census data from 2002).

To better appreciate the facts, it is important to view them in light of the poverty thresholds (income levels below which a person or a family is considered “poor”) for 2002. Towards that, here are some of the 2002 poverty thresholds from Census.gov.
  • Single person: $9,183
  • Two person household: $11,756
  • Three person household: $14,348
  • Four person household: $18,392
In 2002, according to the US Census Bureau, there were about 35 million “poor” Americans - people who were below those thresholds.

Now, let’s move on to the "typical" characteristics of these poor people, as mentioned in the report [by the way, always keep in mind that “typical” does not mean “all” - it is just a statistical average, and there are always some data that do not fit in this average].

The following are facts about persons defined as “poor” by the Census Bureau, taken from various government reports:
  • Forty-six percent of all poor households actually own their own homes. The average home owned by persons classified as poor by the Census Bureau is a three-bedroom house with one-and-a-half baths, a garage, and a porch or patio.
  • Seventy-six percent of poor households have air conditioning. By contrast, 30 years ago, only 36 percent of the entire U.S. population enjoyed air conditioning.
  • Only 6 percent of poor households are overcrowded. More than two-thirds have more than two rooms per person.
  • The average poor American has more living space than the average individual living in Paris, London, Vienna, Athens, and other cities throughout Europe. (These comparisons are to the average citizens in foreign countries, not to those classified as poor.)
  • Nearly three-quarters of poor households own a car; 30 percent own two or more cars.
  • Ninety-seven percent of poor households have a color television; over half own two or more color televisions.
  • Seventy-eight percent have a VCR or DVD player; 62 percent have cable or satellite TV reception.
  • Seventy-three percent own microwave ovens, more than half have a stereo, and a third have an automatic dishwasher.
Here is what the report says about the food/hunger situation of the poor people:
  • When asked, some 89 percent of poor households reported they had “enough food to eat” during the entire year, although not always the kinds of food they would prefer. Around 9 percent stated they “sometimes” did not have enough to eat because of a lack of money to buy food.
And, about the general financial situation:

  • Some 70 percent of poor households report that during the course of the past year they were able to meet “all essential expenses,” including mortgage, rent, utility bills, and important medical care.

The report later concludes:
  • The typical American defined as “poor” by the government has a car, air conditioning, a refrigerator, a stove, a clothes washer and dryer, and a microwave. He has two color televisions, cable or satellite TV reception, a VCR or DVD player, and a stereo. He is able to obtain medical care. His home is in good repair and is not overcrowded. By his own report, his family is not hungry and he had sufficient funds in the past year to meet his family’s essential needs. While this individual’s life is not opulent, it is equally far from the popular images of dire poverty conveyed by the press, liberal activists, and politicians.
Honestly, the data had me confused about my definition of poverty. Irrespective of how low the income is, if a person (or a family) is able to enjoy most of the things that an average family can enjoy, is able to get proper nourishment, and is able to meet all “essential expenses”, how can such a person be termed as “poor”?

These facts bring up some food for thought. Here is what I have been thinking:

  • Can people really be defined as “poor” based on the income criteria? In the same breath, if income is not a good criteria for defining the “poor” - then it cannot be a good criteria for defining the “rich”.
  • If you look at all the things that a “typical” poor person is enjoying - and then look at the poverty threshold (income level) - it seems to me that poor people might be doing things frugally. Of course this doesn’t say whether they are more (or less) frugal than rich people.
  • It can also be construed that poor people are being too consumerist and in fact, are "poor" in the first place because they try to buy too much on too little income. However, “too little” is a very relative term - and it doesn’t make sense to put any dollar amount income levels here.
  • Is a person, who is $2,000,000 in net debt, but living in a mansion and earning $100,000 a year, richer or poorer than someone who has a positive net worth but is making ends meet with great difficulties (barely able to provide food, education, shelter, etc) ?
  • So who exactly classifies as poor? a person facing financial hardships? but hey, that can happen to people with high income and bad spending habits.
I still don’t have any conclusive answers yet… if you have any, please enlighten us.

©thetaoofmakingmoney.com

Building Your Profitable Tax Lien Portfolio

Your first step to building a profitable tax lien or tax deed portfolio was deciding why you want to invest. This will determine how you are going to invest. Will you invest through a self-directed IRA or with after tax funds; in your own name or through an entity; in tax liens, tax deeds, or redeemable tax deeds? Once you determine how you are going invest, the next step is to decide where you will invest. What state and county are you going to invest in?

Once your done with steps one and two, the why and the how, it's time to concentrate on the what. The third step to building your profitable tax lien portfolio is finding the tax sale information. You need to find out when and where the tax sale is held and obtain a list of properties that are in the sale. For most areas this step will be easy, you just need to know where to go and who to contact to get this information. Sometimes you will have to pay for it and sometimes you will be able to get it free of charge.

Each state is a little different in regard to how the tax sales are conducted and who is responsible for them. In some states you'll have to contact the county tax collector, in others it could be the county treasurer, or the county sheriff, or there could be a separate county office just for this purpose. I recommend that you first contact the county tax collector, or whoever is responsible for the tax sale and ask for the tax sale information. Ask for a list of tax sale properties. Usually you can get this list for free and sometimes it may eve be available online.

All tax sale lists are not created equal. Some lists will have all the information that you need to do your due diligence (the next step in the process of building your profitable tax lien portfolio) and some will only list the tax number, block and lot, owner of record, and amount due for each property in the sale. The physical address of the property may not be included. If that is the case, you have two choices, you can buy a detailed tax sale list that includes all of the information that you need, or you can look the information up yourself, which can be a very tedious process.

Very large detailed tax sale lists can be quite expensive, even a few hundred dollars, so if there are a lot of properties in the tax sale you would be better off to limit the amount of properties that you are interested in and look up the information that you need yourself. You can limit yourself to a particular area, or to only certain types of properties to make the next step in the process a little easier. If the list is not that large and costly, you may want to buy the tax sale list from a tax sale list provider. It will save you lots of time in doing your due diligence.

Author Info:
This is the fourth article in a series of eight about the seven steps that you need to follow in order to build a profitable portfolio of tax lien certificates or tax deeds. If you missed the previous articles in this series you can read them at http://www.taxlienconsulting.blogspot.com . To find out more about investing in tax lien certificates or tax deeds, you can register for free telesmeniars at http://www.taxlienlady.com/teleseminar.htm

Income - Tax Planning Tip For 2007

The beginning of a new year is a time for contemplation, reflection and doing a little planning. As 2007 quickly approaches, you need to give some thought to your tax planning for the year.

Income - Tax Planning Tip for 2007

If you complain because you feel you are paying far too much in taxes, you may be right. So, is the government giving you the once over when it asks for that check in April? Well, it is probably is. On the other hand, there is a person you know much better who is often also to blame. Who? YOU!

The key to minimizing your taxes is to take the time to do tax planning. This planning should be done in January for the upcoming year. “Tax planning” is not sitting down with your accountant on April 14th and trying to reduce your tax bill. If you act proactively, and ahead of time, you can do a lot to keep your money out of Uncle Sam’s hands.

As we enter 2007, you should begin to contemplate your tax planning for the year. At this point, I would typically go into a long spiel about maximizing deductions, retirement accounts and so on. While you should still do all of these things, the 2007 tax year is shaping up to be something a bit different. Why? Politics, my friend.

As you well know, the recent elections resulted in a major political change in Washington. Out went the Republican majority and in came the Democrat majority. In both houses! Regardless of your politics and whether you think this is a good or bad thing, the tax change winds are beginning to blow in the wind.

If you have been watching the fiscal figures for the federal government, you know our national debt has been expanding at an alarming rate. While there are a variety of reasons for this, the combination of tax cuts and an expensive war are certain two of the primary ones. Now that President Bush does not have a friendly Congress and is a lame duck, you should expect an effort to address the red ink. Since no exit from Iraq seems to be on the horizon, it is reasonably to suspect we will see taxes raised. This probably will not happen until later in the year or 2008, but you should be planning for it now.

When putting together you tax plan for 2007, you need to consider how you can best take advantage of the current low income tax rates. Assume you have some source of revenues or assets that trigger income tax payments when you receive the money or sell them. If any of these are going to occur in 2008 or beyond, you might consider trying to move them forward into 2007. By doing so, you can take advantage of the current rates instead of getting caught with your pants down when rates go up.
By: Richard A. ChapoRichard A. Chapo is with
BusinessTaxRecovery.com - providing information on tax debt relief.

Tax Return Online Is There For Proper Guidance

Taxes are something that has to be filed within the time period allotted, so that unnecessary problems and tax raids can be avoided. In fact, nobody wants to entangle themselves in raid problems and ruin their business. Tax return is one of those issues that require complete concentration in the matter of tallying of the financial documents. As far as the financial documents are concerned, there are a lot many to be tallied. Profit and loss account, trial balance, financial statements, balance sheet, daily bills receivables and payables and a lot many things form a part of financial documents. In order to simplify the process of filing tax return, online services have been started. Tax return online has helped the tax filers to a large extent.

Tax season is the time, when all the accounting firms witness heavy load of work. Every certified public accountant is seen busy in paper work because every other small element needs to be checked before one gets to know the tax amount to be paid. With tax return online, things have come a bit under control. Now, you don’t have to run to your accountant every time for asking queries and seeking his or her guidance in this regard. Tax return online will enable you to contact a certified public accountant through internet and send them the details. Before giving your case to any accountant, you should make sure that the accountant is certified through American Institute of Certified Public Accountant. After all, you are going to handle your tax return filing case and accountant has to be properly qualified for that.

There are numerous accounting firms that have their websites, on which you can find the option of tax return online. In doing so, you will be able to save a lot of money along with the valuable time. Filing tax is really a hard nut to crack and if you are able to get the services of tax return online, then you surely are the lucky chap. Almost every tax return online firm provides the facility of calculating the exact amount of the tax that has to be filed. After all, you have the right to know the amount that you are paying and details regarding this too. This service has been preferred by every tax payer, especially at the time of heavy tax paying season.

What will happen if you are not able to get the services of qualified and certified public accountant at the time when essentiality arises? It is the tax return online service that comes to the rescue. Almost all the tax return online firms provide their services at a reasonable rate. And this saves you extra dollars that would have gone wasted in giving to the in-house staff. Calculating tax amount and filing them at income tax office is a tiring legal process. So, it is always better for you to opt for the services of certified public accountants.

Since the idea of tax return online has come up, every other business individual is speaking in its favor. Who wants to waste extra time that could be utilized for doing other tasks? Everyone’s time is precious and it is valued like money, so there is no point in wasting time and money in roaming around in search of certified public accountant. If you are not able to find a CPA near your place, then internet is there to solve your problem. All you can do is look out for the CPA that is near your place. But be sure that you must not get swayed by what is written on those sites. You get to meet them personally and see to it that they are bale to handle your case or not.

By: Michelle Barkley
Michelle Barkley is a CPA working for Ifrworld.She specializes in Bookkeeping outsourcing,
Accounting outsourcing and Tax Return Online.To know more about
Tax Return Online and to use the services visit ifrworld.com

The power of lower taxes

For his final curtain call as Chancellor, Gordon Brown delivered a truly big Budget. He broke with his own recent past by sharply cutting the headline tax rates for individuals and businesses and taking the first steps towards simplifying an over-complex taxation system.
It is a tribute to Brown's mastery of the Treasury that in his tenth year in office he is still capable of taking far-reaching decisions on the way the nation's finances are managed. This is made easier by the fact that Britain is enjoying a golden period of economic expansion stretching back over the ten years of the Chancellor's stewardship. It means that Brown will leave the Treasury on a high note.
His last Budget also represents a sharp change of direction. Since Brown decided to lavish a fortune on the NHS eight years ago, the Budgets have all been about expanding the public sector, which has grown at a phenomenal rate of 5% a year after inflation.
But the glory days of big spending are now over. The extra NHS spending that Brown referred to in his Budget speech yesterday has already been announced. The stark reality is that under the new public spending settlement, which will be unveiled in the Autumn, average real growth in public spending will be just 2% - which will mean that in some cases there will have to be actual cuts.
Some departments are taking genuine cuts. Only education is singled out for extra spending and it will be receiving an increase of just 2.5% above inflation. Brown's successor at the Treasury is likely to continue to wield the axe, rather than dishing out the largesse. By all accounts Brown and his colleagues have actually been listening to the criticism of his economic management by the Organisation for Economic Co-operation and Development, the International Monetary Fund and others. The Chancellor has decided to draw in the claws of the state and focus instead on restoring Britain's global competitiveness. The cut in the headline rate of corporation tax to 28% will mean it is substantially below the 34% rate in France and 38% in Germany.
It is a radical change directly aimed at keeping Britain an attractive place to locate for the new light-footed businesses which will dominate the 21st Century including financial services, pharmaceuticals and the creative industries.
The Budget pays for this tax reduction by removing allowances which largely benefit older industries - such as the energy utilities (many of them foreign owned) - which have been able to claim allowances on old plant dating back to the Second World War.
By lowering the main corporation tax and removing out-dated allowances, he has made a key move towards simplification of the system - and stolen one of the key reforms proposed by the Tory tax commission. Simpler taxation is also at the heart of the personal tax changes. By cutting 2p from the basic rate of income tax and abolishing the 10p band, which was introduced in Brown's 1999 Budget, it means there will now be just two bands: 20% and 40%.
Moreover, for the first time the thresholds for paying income tax and national insurance will be the same - a reform called for by the Institute of Fiscal Studies. We may be a long way from 'flat taxes' (where there is just one rate of tax for both individuals and corporations) in the newly emerging markets of Eastern Europe, nevertheless the system should be easier to understand.
Although some will be worse off, the net impact of the mass of personal tax changes will be that overall the public will be paying £2.5billion less in income taxes. This reduction-will be largely paid for by the extension of green taxes, most notably on gas guzzling cars and a new tax on property companies who leave shops empty on our high streets.
By using tax reductions to drive the economy, rather than public spending, Brown is recognising the importance of the wealth-creating sector of the economy. Something he has been loathe to do in the past when he has relied on public spending to boost output.
In this latest Budget, however, Brown is having to deal with a sharp drop in the tax revenues from the North Sea as production declines and the world oil price falls. He will be borrowing an extra £12bn over the next five years above and beyond what was forecast in December's pre-Budget Report.
But he will continue to abide by his own fiscal rules. The 'golden rule' which requires borrowing only for investment in infrastructure is met and overall debt as a proportion of the total output of the economy remains below 40% at 38.2%.
There will be much quibbling in the City, from the IFS, other think tanks and the Tories about these figures. Brown is accused of using 'off balance sheet' borrowing, through the private finance initiative, and selling public assets to remain on target.
Yet the fact remains that the Chancellor, in his ten years, has changed the nature of the British economic debate. It is no longer about missing the target for the Budget deficit by tens of billions of pounds - as was the case previously - but is focused around rules which are designed to enforce prudence.
It would, of course, be far better had the Chancellor taken the opportunity to trim the public sector much earlier during his reign.
The main concern for the Government now is that the next rise in interest rates will slow growth. Yet the financial markets and business will find it hard to bet against the output projections of a Chancellor whose figures have often proved right. This is especially true now that, in his last weeks in office, he has discovered the awesome power of lower tax rates.

Alex Brummer, Daily Mail

The virtues of a 401(k)

Uncle Sam doesn't offer many gifts. This is one.

If someone offered you free money, would you refuse it? Probably not. But that's just what you're doing if you don't contribute to your 401(k). The more you contribute, the more free money you get. Here's why:

Contributing part of your salary to a 401(k) gives you three compelling benefits:

  • You get an immediate tax break, because contributions come out of your paycheck before taxes are withheld.
  • The possibility of a matching contribution from your employer - most commonly 50 cents on the dollar for the first 6 percent you save.
  • You get tax-deferred growth - meaning you don't pay taxes each year on capital gains, dividends, and other distributions.

The federal limit on annual contributions has been increasing gradually, and is $15,500 in 2007. If you're 50 or older, you may contribute an additional $5,000.

Keep in mind, however, that while federal law sets the guidelines for what's permissible in 401(k) plans, your employer may set tighter restrictions. Plus, it will take time for the administrators of your plan to implement the changes.

What's more, there are other federal non-discrimination tests a 401(k) plan must meet, one of which applies to "highly compensated" employees. So if you make more than $100,000 a year (the limit for 2006 and 2007), you may not be permitted to contribute as high a percentage of your salary as some of your lower paid colleagues.

For all its tax advantages, the 401(k) is not a penalty-free ride. Pull out money from your account before age 59-1/2, and with few exceptions, you'll owe income taxes on the amount withdrawn plus an additional 10 percent penalty.

Also, be aware of your plan's vesting schedule - the time you're required to be at the company before you're allowed to walk away with 100 percent of your employer matches. Of course, any money you contribute to a 401(k) is yours.



from CNN money

401(k)

1. A 401(k) offers three compelling benefits.

A 401(k) represents a way to reduce your taxable income since contributions come out of your pay before taxes are withheld; many plans include a matching contribution from your employer; and the money you save benefits from tax-deferred growth, which lets your money compound more quickly than it would if it were taxed yearly.

2. The federal limit on annual pre-tax 401(k) contributions is on the rise.

In 2007, the maximum contribution rises to $15,500, or $20,500 if you're 50 and older.

3. Matching contributions are "free money."

If you can't afford to max out your 401(k), contribute at least enough to get the matching contribution, a.k.a.. free money. The typical match is 50 cents on the dollar up to 6 percent of your salary.

4. Taking money out of a 401(k) before retirement is expensive.

Loans must be repaid with after-tax money plus interest. And, with few exceptions, if you withdraw money before age 59-1/2 you must pay income taxes plus a 10 percent penalty. What's more, lost time for compounding will substantially shrink your nest egg.

5. When setting up your 401(k) investments, figure out what your mix of stocks and bonds should be.

Two factors influence this decision: your time horizon until retirement and your risk tolerance.

6. You're limited to the investments your employer chooses for your 401(k) plan.

If you don't like many of the selections, keep your choices simple by investing, for example, in a broad-based index fund. Don't boycott the plan altogether. If you do, you lose out on tax-advantaged compounding and a matching contribution.

7. When you change jobs, you'll often have three choices: leave your 401(k) money where it is, roll it into an IRA or another 401(k), or cash out.

If your account balance is less than $5,000, your employer may insist you take it out of the plan, but cashing out is like shooting yourself in the foot financially. Even small amounts can grow large with time and tax-deferred compounding. You'd be better off rolling the money into another retirement account.

8. When you do roll money into an IRA or 401(k), make it a "trustee-to-trustee" transfer.

That is, have the check made out to the custodian of your new account, not you. Otherwise, you risk possible penalties if you fail to execute the rollover properly.

9. IRS rule 72(t) provides one way to take early 401(k) withdrawals without penalty.

You must take a fixed amount of money out for five years or until you reach 59-1/2, whichever is longer. The annual withdrawal amount is based on your life expectancy.

10. Some employers let you leave money in your 401(k) account when you retire.

Find out what rules, if any, the employer imposes on when and how you must start taking distributions. If there are none, you may leave the money untouched until you're 70-1/2. That's the age when Uncle Sam insists all retirees begin withdrawing money from traditional IRAs and 401(k)s.



from CNN money

Looking for tax accountant


When looking for a professional to handle your taxes, you need to make sure that you make the right choice. There are many benefits of having a tax accountant handle your taxes, but you should ask plenty of questions before you place all of your most important information in a stranger's hands.

Why would you need a tax accountant? Most people feel that they can handle their own tax situation, however, there are some benefits that make hiring someone well worth the cost.

For example, preparing your own taxes can be quite time-consuming and stressful. You can be left with a lingering fear of an audit situation. Many people are frustrated and confused -- which can lead to mistakes. Hiring a professional gives your tax returns an increased level of accuracy. Your tax situation could be quite complex, including stock market investments, business dealings, rental properties and other tax situations. If it is, you will need specialized advice.

If you have the goal of paying as little taxes as possible, a tax professional could be very helpful. He or she can provide you with detailed planning and advice. If you are facing a tax situation, such as the filing of back taxes, paying off a tax debt or fighting an audit, you shouldn't go through it alone.

When looking for an experienced tax accountant, you need to make sure that you find the best professional for your financial situation. Ask your friends, family and business associates who they would recommend. It helps to ask someone who has a similar tax situation as you do.

Accountants should never promise you big refunds. If someone tells you that everything is deductible, you should be wary. You will be ultimately responsible for all of the information on your tax return in the eyes of the IRS, not your accountant.

There is nothing wrong with switching accountants. If you aren't comfortable or feel that your accountant isn't right for your financial situation, you need to do what is best for your tax situation. Don't feel that you have to be loyal to your accountant no matter what. I recently had a friend tell me that they stay with their accountant because he is great at what he does, even if he doesn't let them take deductions that they qualify for.

If you have a relatively straight-forward tax return, retail franchises could provide adequate services for your needs. Some tax preparers are more experienced. You often can find a CPA or an Enrolled Agent working in a tax preparation company. Ask if you can meet with a CPA, enrolled agent or the senior tax preparer. As you are charged by the number of tax forms necessary to file your taxes, you won't pay any more to talk to someone with more experience.

Local tax firms offer specialize in individuals and small businesses. Make sure that you check out their expertise to make sure that they can handle your taxes. Enrolled Agents have passed a rigorous test and a background check by the IS. They often specialize in complex tax situations. CPAs have passed the CPA exam and are licensed by the state they work in. They usually specialize in specific areas, such as audits, taxes or business consulting. They are best for complex accounting, however not all CPAs will handle tax situations.

Tax attorneys have chosen to specialize in tax law. They usually have their juris doctor degree and a master of laws degree in taxations. They are great for handling your complex legal matters, such as estate tax returns.

When meeting with a tax professional, you should ask some questions to ensure that you find an experienced, trustworthy tax accountant.

Make sure that you ask the following:

  • How long have you been in business?
  • What licenses do you have?
  • What tax issues do you specialize in?
  • Do you have experience in tax situations like mine?
  • Do you outsource any work?
  • How long will it take to complete my tax return?
  • What is your privacy policy? Will my information be shared with any third-parties?
  • Am I currently paying too much, too little or just the right amount of taxes, in your opinion?

Tax accountants usually have very different attitudes about the US tax system. You want to find one that you can work well with and trust with your finances. You want to find an experienced, competent tax accountant who specializes in your situation and can help you minimize your taxes.

After you have narrowed down your choices, perform a quick background check. Contact your state's board of accountancy to check on the license. They can tell you if any disciplinary action has been taken against the CPA. The IRS Office of Professional Responsibility can help you with Enrolled Agents, their licensing and their disciplinary history.

Six don't-miss tax breaks

As carrots go, admittedly there are sexier ones to be had. But the rabbit food of choice dangling before you this and every tax-filing season is the opportunity to minimize your tax bill or maybe even score a refund.

Getting that carrot (legally) usually means taking full advantage of legitimate tax breaks. So it pays to know what they are and how to figure out whether you're entitled to take them.

Below is a list of six key breaks that may serve you when filing your 2005 taxes this year.


Some payback for your purchases?

If you live in a state with no wage income tax or you live in a state with very low income taxes but high sales taxes, you might get a bigger break on your federal return than you're used to.

That's because for tax year 2005 you'll be given a choice: You may deduct you state and local income taxes on your federal return. Or, instead, you may choose to deduct the general sales tax you paid in 2005. So if you made big purchases last year, your sales tax outlay may have exceeded your income tax outlay.


Use your alimony to save for retirement and get a deduction.

If you're divorced and don't have a paying job, you may think you're not allowed to make an IRA contribution, because the rule is you must have earned income to do so. However, alimony received is treated as taxable income on your federal return, so, in fact, you are eligible

The ex-spouse who pays the alimony may use the payments to reduce his or her gross income.

Didn't make much last year? Take advantage of the saver's credit.

Maybe you ditched a salaried career in the past couple of years to try your hand as a small business owner. Chances are your paycheck has never been so low, since much of the money you make may be plowed back into the venture. Or maybe you're just a recent college grad in your first job. Well, here's one salad-days perq:

Low-income taxpayers may receive a credit (a dollar-for-dollar reduction of the taxes they owe) for 50 percent of their contributions up to $2,000 to qualified retirement savings plans such as 401(k)s, 403(b)s as well as IRAs.

The benefit is three-fold: you contribute to your retirement savings, you reduce your taxable income if you contributed to a 401(k) or deductible IRA, which can reduce your tax liability, and then the credit for that contribution will reduce your tax bill further.

The credit is available only to those taxpayers with an adjusted gross income of $25,000 or less ($50,000 or less for married couples). And the credit may not exceed your tax liability.

You have until April 15, 2006 to put money in an IRA and have it count as a 2005 contribution. The contribution limit is $4,000 if you're under 50, $4,500 otherwise, assuming you earned at least that much in 2005.

You don't need gains to make the most of your losses.

Many investors know they can use their stock losses to offset the taxes they owe on their stock gains in a given tax year. If the losses exceed the gains they can use up to $3,000 in losses to offset ordinary income.

But you don't have to have gains to write off losses up to $3,000 of income if you had a holding that became worthless in 2005, said certified public accountant Alan Dlugash, who chairs the Taxation of Individuals Committee for the New York State Society of Certified Public Accountants.

And by worthless he means having a value of $0. For tax purposes that holding would be considered sold as of Dec. 31, 2005, Dlugash said. So you can use that as a loss to offset up to $3,000 of ordinary income on your federal tax return.

Think broadly when it comes to home-office deductions. Requirements to qualify for big home-office deductions (e.g., a portion of your rent and utility bills) are fairly stringent and tend to be scrutinized by the IRS.

But even if you don't qualify for the big expenses, you may still deduct smaller items like the cost of hooking up a second phone or fax line, or the cost of office supplies.

Generally speaking, "any costs that you incur that assist you in earning income is deductible," Dlugash said.

The exceptions are those items you would buy for personal use anyway, such as that nice suit you wore to wow potential clients or your television.

To see which home office deductions you'd be entitled to take, check out tax publisher CCH's home office deduction site and calculator.

Move what you can above the line.

An above-the-line deduction (e.g., alimony you paid, business expenses, stock losses up to $3,000, deductible IRA contributions) reduces your gross income, and therefore your adjusted gross income (AGI).

Since eligibility for most "below-the-line" deductions – which you take only if you itemize -- is tied to AGI limits, lowering your AGI will increase your chances of being eligible for other tax breaks.

So you want to make sure you deduct what you can above the line.

Take business expenses. Maybe you have a full-time salaried job. But you also borrow money to invest in a rental property with your brother. You may be able to deduct the loan interest as a business expense, Dlugash said. Ditto for any materials or classes you paid for to educate yourself about becoming a landlord, not to mention the cost of travel to and from your rental property.

If you're a homeowner, you may be able to move a portion of your mortgage interest and property tax deduction (which normally is an itemized deduction) and count it instead as an above-the-line business deduction if you have a home business, according to Dlugash and CCH. That would reduce the income on which you must pay self-employment taxes. (For more on this, click here.)

Indulge your inner procrastinator if you must.

Sure, there are three months until April 15, but if that's just too tight a timeframe for you, this year you're allowed to apply for a free, automatic 6-month filing extension, no questions asked. Keep in mind, though, the extension is only good for filing your return, not for paying what you owe. For that, Uncle Sam will insist you fork it over on time and in full.

10 Strategies to Cut your Tax Bill


1. Make your January payment in December. That way, you can deduct the additional month’s interest. Your January payment is for the use of the money in December, and the interest can be deducted if paid and mailed prior to January 1st.
2. Defer Income. Tax rates are decreasing. Collect your bonus in 2007 rather than 2006. If you’re self-employed, try to hold off your billing in December so your income checks come in January. This will carry your income over to the next year.
3. Accelerate expenses. Prepay your tax preparer with a check before December 31st for the return he prepares in the next year. Prepay your Keogh or IRA fee or any other investments expenses.
4. Pay your fourth-quarter real estate taxes before December 31st. Fourth-quarter taxes are due February 1st. If you pay your fourth-quarter tax before December 31st, you will be able to deduct that tax payment one year earlier.
5. Remaining money in your Salary Reduction Plan. These plans are called flexible spending accounts. These accounts require you to reduce your salary by a given amount that goes into a fund that can pay certain benefits, such as medical expenses and dependent care expenses. If you don’t use it, you will lose it. If you have money in this account, spend it! Prepay orthodontia or buy that second pair of glasses, etc.
6. Make charitable contributions. You can make a contribution with cash or charge it on your credit card. Other contributions can include donation of clothes, furniture, or equipment. Make sure to always get a receipt for every contribution you make.
7. Pay estimated state income taxes by December 31st. State taxes are due around January 15th. By paying them by December 31st, you get to deduct the taxes a year earlier.
8. Recognize any capitol losses. Sell non-performing stocks before December 31st. Any losses offset your capital gains first, and the next $3000 of losses can offset ordinary income. Any excess losses are carried forward into your next year.
9. Get married…or divorced. If your marital status is determined as of December 31st, you may qualify for a marriage bonus. If you plan to divorce, make sure it’s done legally and before the end of the year. This may qualify you for some tax savings.
10. Open a Keogh account if you’re self-employed. You can contribute as much as 20% of your net Schedule C income into a Keogh tax-deferred retirement plan, and your contribution is deductible.

Ten Strategies to Cut Your Tax Bill
1. Make your January payment in December. That way, you can deduct the additional month’s interest. Your January payment is for the use of the money in December, and the interest can be deducted if paid and mailed prior to January 1st.
2. Defer Income. Tax rates are decreasing. Collect your bonus in 2007 rather than 2006. If you’re self-employed, try to hold off your billing in December so your income checks come in January. This will carry your income over to the next year.
3. Accelerate expenses. Prepay your tax preparer with a check before December 31st for the return he prepares in the next year. Prepay your Keogh or IRA fee or any other investments expenses.
4. Pay your fourth-quarter real estate taxes before December 31st. Fourth-quarter taxes are due February 1st. If you pay your fourth-quarter tax before December 31st, you will be able to deduct that tax payment one year earlier.
5. Remaining money in your Salary Reduction Plan. These plans are called flexible spending accounts. These accounts require you to reduce your salary by a given amount that goes into a fund that can pay certain benefits, such as medical expenses and dependent care expenses. If you don’t use it, you will lose it. If you have money in this account, spend it! Prepay orthodontia or buy that second pair of glasses, etc.
6. Make charitable contributions. You can make a contribution with cash or charge it on your credit card. Other contributions can include donation of clothes, furniture, or equipment. Make sure to always get a receipt for every contribution you make.
7. Pay estimated state income taxes by December 31st. State taxes are due around January 15th. By paying them by December 31st, you get to deduct the taxes a year earlier.
8. Recognize any capitol losses. Sell non-performing stocks before December 31st. Any losses offset your capital gains first, and the next $3000 of losses can offset ordinary income. Any excess losses are carried forward into your next year.
9. Get married…or divorced. If your marital status is determined as of December 31st, you may qualify for a marriage bonus. If you plan to divorce, make sure it’s done legally and before the end of the year. This may qualify you for some tax savings.
10. Open a Keogh account if you’re self-employed. You can contribute as much as 20% of your net Schedule C income into a Keogh tax-deferred retirement plan, and your contribution is deductible.

Microsoft Money Deluxe

Microsoft Money Deluxe program covers all of the bases of personal finance—banking, investing, financial planning and taxes. Microsoft Money fulfills the needs of the seasoned investor and the homemaker.
This choice financial software package is comparable to our top pick in most features and even seems to be a little more user friendly. However, Quicken offers more reports, producing a clearer and fuller illustration of your entire financial status.


Ease of Use/Installation:
While using Microsoft Money, you'll notice tabs at the top of the screen that show you exactly what section you are in. Just click on the tab of the section you're looking for and you're there. These tabs make a complex program of this type really very easy to navigate.
A tour introduces the software and a help window answers questions about the program and its features. Because personal finance encompasses so many facets, plan on spending some time becoming familiar with the program.
We had no problems or errors during the installation and setup of this product.

Banking/Bills:
Microsoft Money Deluxe allows you to manage multiple accounts at multiple banks or credit unions. Once your accounts are set up in the program you can transfer money, make deposits and make electronic payments.
This program also provides an amortization schedule that shows exactly what your loan payments are and how a better interest rate would effect your payments. The schedule also shows what you're paying towards interest versus principle—so you can determine how much faster a loan can be paid off by paying above the minimum payment.

Reporting:
Microsoft Money Deluxe has a limited reporting section when compared to some of the other personal finance products we reviewed—offering seven reports in all.

Financial Planning:
Microsoft Money Deluxe has an incredibly inclusive financial planning section that covers insurance, debt reduction, retirement, college and planners to help you organize life's big events so you can be prepared for the future.
This product also includes an array of specialty calculators to assist in the planning process—you can calculate college expenses, taxes, the cost of your Roth IRA, life expectancy and more.

Personal Investing:
Microsoft Money Deluxe works directly with Ameritrade so you can view all of your investments online. They offer stock quotes, history and individual stock projections for the next six months. Because of this partnership, you can receive up to 35 free trades with your purchase of Microsoft Money.
The program also allows you to allocate all your assets, manage your 401K and use the capital gains estimator.

Tax Options:
Microsoft Money Deluxe has the ability to export all your financial information into the H&R Block tax software, TaxCut, saving you time and avoiding errors. While doing your taxes Microsoft Money will help you find deductions, optimize and estimate your capital gains and estimate your tax withholdings. The program will also offer audit help, incase the IRS decides to step in.
The tax section also includes IRS publications on the tax law changes, a newsletter, and some general questions and answers—very useful information when filing your taxes.

Summary:
Once again Microsoft has put together a very practical software package with Microsoft Money Deluxe by offering easy-to-use tools and a program that interacts with the web to provide tons of information.

The bottom line—Microsoft Money Deluxe is exceptionally user-friendly and effective, but offers limited financial reports.

Personal Finance Software

Managing your money can be an overwhelming and discouraging chore, but through personal finance software, your finances can be organized and you can look to the future with the security of knowing you'll have enough money to take care of the necessities of life.

Through personal finance software you can bank online, utilizing transactions, deposits and online bill pay, manage your portfolio and 401K by trading stocks, mutual funds and bonds, receive real-time stock reports, current tax articles and other information so you can wisely direct your money and make good financial choices. Then easily export your data to tax software to get the most out of taxes.

Personal financial software can provide reports and graphs, giving you a clear illustration of where your money has been, where it is and where it's going. These reports are priceless when planning your financial future.


What to Look for in Personal Finance Software

Ideal personal finance software provides ample user-friendly features that allow you to manage every aspect of your finances including your accounts, investments, future plans and taxes. The software should also provide current information on tax laws and stock reviews so you can make informed decisions. Below are the criteria this site used to evaluate personal finance software.
  • Ease of Use/Installation – Personal finance software that offers intuitive navigation, user-friendly features and is easy to install ranked higher in our reviews.
  • Banking/Bills – Personal finance software should include features in the area of online banking, including: electronic payments, account transactions, account reconciliation, the ability to write and print checks and the ability to exchange currencies, that make banking from your PC convenient.
  • Personal Investing – Personal finance software that offers an investment feature used to get stock quotes and manage your mutual funds, stocks, bonds and 401K, so you can take care of all your investing needs.
  • Financial Planning – Personal finance software that allows you to plan your retirement, purchases, taxes, lifetime events, home purchases, debt relief and other financial goals and money management concerns and provide financial calculators to help you estimate costs, plan collage expenses, savings, taxes and so on.
  • Tax Options – Some personal finance software can export all of your financial information into tax software and help you find missed deductions and estimate your tax withholdings and capital gains.
  • Reporting – Personal finance software that provides reports and summaries of your finances so you can plan your cash flow and invest more wisely.
Through personal finance software, you can manage your finances conveniently and stress free, stop money leaks, make better investments and increase your personal net worth. In short, with personal finance software you can make your hard-earned money work harder for you.
How do you manage your money? Investments? Do you remember what your roommate owes you, or what you owe someone else for lunch when they picked up the tab? Can't keep track of where you're spending all your money? Pulling your hair out after paying for your medical bills? Need to cut back, so that you can save and find a nice home? Or maybe you'd rather spend your lucre on a vacation for the best price.

The smart way to money management, personal finance, and investing is to use the right tools — tools that aren't so intimidating that you'll ignore them after a while. This guide to the top 25 web 2.0 applications should help you with the above will come in handy when it comes to managing all your money concerns. [If you're not familiar with "web 2.0", read: what is web 2.0, or the compact definition.] Many of these apps have a community nature to them, so if you need some friendly advice from members, or wish to give it, you can.

Applications are listed approximately in alphabetical order within each grouping (except when two apps are described jointly.) Most of the services covered here are either free or have a free component or trial.

Lending, Borrowing This group of applications refers to those in which money actually changes hands electronically, either as part of a loan or as some form of payment (but not as part of an investment). Mobile applications have been left out, as the term web 2.0 hasn't yet been widely extended to smart phones and PDAs.

  1. Prosper
    Prosper
    Prosper offers social networks for peer-to-peer community loans and financing. A group leader can create a new group and invite people to become members. An individual can register as a borrower and loan prospects can build a profile for themselves. Loans from a lender can be distributed to a single person or divided amongst several borrowers. A borrower's loan might come from a single lender or several, to reduce risk, and borrowers can choose from whom they select loans, based on the interest rates offered.

  2. Zopa
    Zopa
    Zopa is a lot like Prosper. It serves as a potential alternative to expensive short-term loan rates, ideal for managing some of your consumer debt. Zopa does differ slightly from Prosper in some regards however. Zopa has nuances in the way loans are qualified and applied. Also note that Zopa is currently an UK-based system, however, they are "coming to the United States".




Personal Finance, Money Management, Expense Sharing


These applications deal specifically with tracking your personal finances and expenditures, paying bills, etc.

  1. DimeWise
    DimeWise
    DimeWise lets you define multiple accounts (savings, checking) and enter and track your transactions, including future expenses. Each expense can have a category tag as well as a note. Expenses can be exported or imported (OFX format, aka Microsoft Money 2002+, Quicken 2004+), set as recurring (daily, weekly, monthly, yearly), and even plotted as a chart to help you determine where your money is going. They have a 30-day free trial.

  2. Foonance
    Foonance
    Foonance bills itself as a flexible way for individuals, couples and families to manage their personal finances. You can track your net worth over what they call "money stores", import your bank statements, "transfer" amounts between stores, "schedule" transactions and categorize them, and view pending transactions and money store balances. There don't appear to be any report capabilities, unlike DimeWise.

  3. iOWEYOU
    iOWEYOU
    iOWEYOU is described as an expenses sharing calculator that roommates or friends can used to keep track of who owes what. The service is free for groups of up to five people. While no money changes hands, it might be great for that insane roommate of yours who calculates rent to the fourth decimal, based on an actual square footage ratio of your room compared to the entire place... Uh, you know what I mean.

  4. NetworthIQ
    NetworthIQ
    NetworthIQ is the recipient of an SEOmoz.orgWeb 2.0 Awards Honorable Mention in "Business, Money, and eCommerce" and was declared #6 in the Top 10 Innovative Web 2.0 Applications of 2005. It's a free personal finance manager that allows you to monitor your net worth, debts, assets, etc. You can share your net worth publicly with other members, and view theirs as well. No private contact information is displayed, though a few PF (personal finance) bloggers do have a link to their website.

  5. Wesabe
    Wesabe
    Wesabe is a web-based personal finance tool where you can manage your finances. They've also added acommunity component where you can share your experiences with money, your saving tips, and your personal money goals. [While Wesabe isn't the only place to share goals, it seems that what was once taboo (publicly declaring your worth and your goals) is now encouraged.] Wesabe actually interacts with your bank accounts, so it's more than just a tracking tool. There are a few tiers of membership, including "free", as well as a free promo on Pro accounts through 2007. This appears to be amongst the most robust of the "personal finance management" tools being offered online at present, and there are many more features than what's covered here.



Stock Market, Investing, Tracking, Portfolio Management


These applications are specifically for tracking stocks and discussing with community members, managing a portfolio, and conducting actual trades.

  1. BullPoo
    BullPoo
    The name BullPoo itself is enough to warrant a look at this investment community where you can "share and collaborate on investment information." It has a rich interface, but possibly a bit intimidating, where you can organize your portfolio, store trade history, set an avatar, write or read blogs on whatever stock, make forecasts on a stock to see how you compare to other members, and loads more. For someone with the investment bug that wants to be part of a community, this site could be a positive "timewaster".

  2. CAPS (Motley Fool)
    CAPS
    The Motley Fool's CAPS application is similar in nature, if not appearance, to BullPoo. At least from a superficial view. It's not so much about tracking your investments as participating in a community and predicting or viewing predictions of stock outcomes. There's a lot here to be absorbed, but it seems like quite a diversion from regular Motley Fool financial advice in that it seems almost frivolous.

  3. DigStock
    DigStock
    DigStock is a Digg-like list of stock market + investing articles. Members submit a synopsis of an article from elsewhere (with the URL) and other members vote for the stories they like. Each story, instead of being tagged with a topic category, is tagged with the appropriate stock ticker symbols. The assumption is that because the article ranking is community-based, active members will help define what type of stories are desirable. And of course, there's the obligatory stock charts.

  4. FeelingBullish
    FeelingBullish
    FeelingBullish is very similar to CAPS in functionality, and also follows a community model of sharing and communicating with other investors.

  5. GStock
    GStock
    GStock is "a virtual supercomputer" for stock market analysis. It runs on a grid computing model and claims to test over one billion investment strategies per stock. Then it emails you BUY/ SELL (B/S) alerts for major US-traded stocks in your portfolio. They also claim that 70% of trades based on their BUY/SELL alerts make profits. Navigation, though, is extremely sparse. Enter a stock ticker symbol in the search field to get a chart with B/S indicators. Then apply common sense as to whether you should take the action offered, based on your price for that stock.

  6. MoneyTwins
    MoneyTwins
    MoneyTwins is not Forex (foreign exchange) trading per se, but rather, if you have foreign currency and want to exchange it with someone for other currency, you can do so with community members instead of a bank - thus reducing commission costs.

  7. SaneBull
    SaneBull
    SaneBull is customizable web interface with movable components that let you track specific stocks by symbol and market, as well as browse news feeds from several financial websites. It uses a number of web 2.0 technologies including AJAX.

  8. StockTickr
    StockTickr
    StockTickr is another social investing application. You can watch animated stock tickers change in real-time, or subscribe to the RSS web feed. Trades are categorized by popular, profit, long, short, open, closed, and alerts. Though what you are watching is based on the portfolios of members. That is, all watchlists are shared amongst the StockTickr community.

  9. Wikinancial
    Wikinancial
    Wikinancial is a financial community where watchlists are shared, as are discussions in the forum — each stock has its own. In addition to the obligatory market and stock charts, there's also an archive of articles, presumably written by members. They have something called the "chat" box, though it's not an integrated IM (Instant Messaging) client, merely a form for starting a new discussion thread. Though provision for real-time chatting, text or voice, might add another dimension to the community, provided some controls such as group moderation were implemented.

  10. Zecco
    Zecco
    Zecco combines two popular features — a financial community and free online investment trading. That's right, free, as in no commissions and no hidden fees. This bold move garnered them thousands of new accounts on launch day, an event that was covered by CNBC TV. To actually trade, you have to provide banking information, employment information, and a government ID, all of which have to be faxed after account confirmation.


Real Estate


These applications help you to find, sell or just manage your real estate properties.

  1. Homethinking
    Homethinking
    Homethinking is a real estate application with a difference. They take an Amazon/ eBay approach in that you can find agents and see "reviews" of that agent, as well a list and a map of what properties they are handling at present. Details of how many properties they have sold are also provided, including location, house details, and asking and final prices. A random query for Atlanta showed a list of agents for whom no reviews were present. However, Homethinking claims over 1.5 million listed agents and nearly 2.5 million transactions.

  2. iiProperty
    iiProperty
    Have real estate in your investment portfolio? iiProperty offers numerous features to help you manage your properties online: advertise properties for sale or rent (allows pictures), send notices to tenants or rent invoices, track rents and leases, view status indicators and alerts, manage income and expenses. iiProperty is a fairly comprehensive package with 5 price points, including Lite (free), which lets you advertise properties, post to Craigslist, and track online ads, leases, tenant records, rent due + received, and more.

  3. Rentometer
    Rentometer
    Need to get away from your insane roomate who calculates rent to mad decimal places? Use Rentometer, which is part of iiProperty. It lets landlords determine if they are not charging enough rent for their area, and tenants can find out if they are being charged too much. A random test for a $1000/m studio apartment in Sandy Springs (Atlanta), Georgia showed that, just down the street, there's an similar unit for only $525. Move, and you can put the savings into stocks, or loan it out on Prosper.

  4. Trulia
    Trulia
    Trulia is a real estate search engine for the United States that gives you the option of specifying price range, property type, # of bedrooms and bathrooms, and square footage. You can specify region by city or zip code, and a search produces not only a list of properties and a link to the appropriate seller, but a Google map of the region with icons marking each. They also offer interactive heat maps which show price trends. So if you are interested in investing in one or more properties, Trulia gives you a birds eye view of what's available that fits your criteria.

  5. Zillow
    Zillow
    Zillow has a database of millions of residential properties that buyers can browse, along with maps, estimates of a property compared against nearby properties, advice on loans, and a loan calculator. Sellers can get an estimate of their home and keep it private or make public. They can also compare profiles of nearby properties. Current homeowners who are neither buying nor selling can get an estimate of their home and compare it to other properties.


Miscellaneous


These are applications that have a web 2.0-ish aspect to them but do not fall into any of the above categories.

  1. cFares
    cFares
    cFares lets you specify desired trip details such as from/to locations, departing/returning dates, time of day (morning, noon, afternoon, etc.), and ticket class (economy, business, first class), and finds you the lowest airfare in their database. They'll also check nearby airports around your from/to locations, to provide alternates. For example, a trip from Boston to Atlanta on Dec 13, returning Dec 20, economy class returned Delta and American Airlines flights ranging from $149 to $199, plus taxes in some cases. While searching is free, these rates are only available to cFares members. Membership allows you to purchase a ticket online.

  2. MedBill Manager
    MedBillManager
    MedBillManager, as the name suggests, lets you manage all your medical records (providers, bills, etc.) online, track payments owed to you, and track medical expenses for easy reporting to the government, insurers, and employers. You can compare your medical costs against that of other members. While MedBillManager is a fairly robust, complex application, they've done a nice job with the explanation page and the sample screens, so it's easy to see the scope of the application.

  3. PayScale
    PayScale
    Want to know whether what you are earning for your job compares to others? Need to know if you are paying an employee fairly? PayScale has a database that spans numerous countries and breaks them down into regions (states, provinces). An interesting thing about PayScale is that it appears to build its database from members. Not exactly accurate if there's false data being entered, but over time, the information will probably become more accurate. They offer you a free salary report as an incentive to fill out your details. In addition, they also have resources (links, articles, etc.) for job seekers.


Additional Sources


Additional (general) sources used for the items above include:

� yourcreditadvisor.com

A Primer on Homeowner Tax Breaks

Thinking about purchasing your first home? Then you're probably well aware of the potential tax breaks coming your way.

In case you're not, let's review. While the cost of renting is generally a nondeductible expense (except for when part of the home is used for business purposes), homeowners can claim an itemized deduction for interest on up to $1 million worth of mortgage debt used to acquire or improve their principal residence. Ditto for interest on up to $100,000 of home-equity debt secured by their principal residence. Real-estate property taxes can be claimed as an itemized deduction, too. You also can generally deduct any points you paid (or the seller paid on your behalf) to take out the mortgage.

But you probably knew all that, right? Now for the tax-law catches your realtor probably never told you about. Don't worry: What's detailed below probably won't have you running back into the arms of your landlord. But it just might give you a more realistic expectation of how homeownership will affect your future tax bills.

The Standard-Deduction Factor
The first thing to understand is that your actual tax breaks from home ownership may be less than expected if you were claiming the standard deduction before you bought. Why? Because the standard deduction is a tax-law freebie. You don't need to have any personal deductions whatsoever to claim it. For 2007, the standard deduction amounts are $10,700 for joint filers, $5,350 for singles, and $7,850 for heads of households.

When your itemized deductions are less than the standard deduction, you simply forgo itemizing and claim the standard allowance instead. Many folks are in this situation until home ownership triggers deductions for mortgage interest and property taxes. Those write-offs — when added to other itemized deductions for state and local income taxes, personal property taxes, and charitable donations — are usually enough to exceed the standard-deduction amount.

The question is: How much of a tax break did you really reap from your home ownership write-offs? For example, say you're married and would have claimed the joint standard deduction of $10,700. Then you buy a house and pay $12,000 a year for mortgage interest and $2,500 for property taxes. On first blush, you might think you've just lowered your taxable income by a whopping $14,500 ($12,000 + $2,500). Not so fast! Assume you also pay state income taxes of $2,000 and contribute $500 to charities. So your total itemized deductions add up to $17,000 ($12,000 + $2,500 + $2,000 + 500). That's only $6,300 above the standard deduction you would have claimed in the absence of buying a home. So you really netted only $6,300 in additional write-offs vs. the $14,500 you might have expected.

Now, if you were already itemizing before you bought or were very close to doing so, your additional deductions from mortgage interest and property taxes will reduce your taxable income dollar for dollar (or nearly so). The point is: Be sure to consider the standard-deduction factor when calculating your anticipated tax savings. That way, you won't be shocked by an unforeseen tax bill next April.

The High-Income Phaseout Factor
If you're a high earner, you're less likely to be affected by the standard-deduction factor. Why? Because you probably have enough itemized deductions (from state and local taxes and charitable contributions) to exceed the standard-deduction amount even without any write-offs for home-mortgage interest and real-estate property taxes. Instead, you may have to worry about the dreaded deduction-phaseout rule that afflicts high-income types.

Once your 2007 adjusted gross income (AGI) exceeds $156,400 (regardless of whether you file joint or single taxes), the phaseout rule reduces your itemized deductions by 2% of the excess. For instance, say your AGI is $300,000. Your otherwise allowable itemized deductions are reduced by $2,872 [($300,000 - $156,400) x .02]. If your AGI is $500,000, your otherwise allowable itemized deductions are reduced by $6,872 [($500,000 - $156,400) x .02]. You get the idea. Not all itemized deductions are affected by this nasty rule, but mortgage interest and real-estate property taxes are. The law provides that taxpayers can't lose more than 53.33% of their deductions under this rule, but that's small comfort to its victims. In fact, itemized deductions for some high earners are curtailed to the extent they wind up back in the standard-deduction mode. When that happens, they don't receive any actual tax benefit from their mortgage interest and property-tax expenses.

Bottom line: If you expect your AGI to exceed $156,400, you'll need to whip out the calculator to figure your actual home-ownership tax savings.

The Home-Equity-Loan Factor
Once you're ensconced in your new home, you may decide to take out a home-equity loan. As mentioned above, you can generally claim an itemized deduction for interest on up to $100,000 worth of home-equity debt. The key word here is generally. The fact is, you can't deduct interest to the extent the home-equity-loan principal plus your first mortgage principal exceeds the value of your home. For example, say your first mortgage is $200,000 and your home-equity loan is $75,000. If your home is worth $250,000, you can deduct interest only on $50,000 worth of home-equity-loan principal. Interest on the remaining $25,000 falls into the nondeductible personal-interest category.

A more likely cause for concern is another rule that disallows any alternative minimum tax, or AMT, deduction for home-equity-loan interest unless the loan proceeds were used to improve your property. For example, say you take out a $50,000 home-equity loan and use the money to pay off a car loan and some credit-card balances. For regular tax purposes, that's fine. You can deduct the home-equity-loan interest on Schedule A, along with the interest on your first mortgage. However, if you're in the AMT mode, you can't deduct any of the home-equity-loan interest in calculating your AMT bill.

On the other hand, if you spend your $50,000 home-equity-loan proceeds on a new pool and covered patio, you're good to go for both regular tax and AMT purposes. And one more thing: The high-income deduction-phaseout rule explained earlier can also whittle down your otherwise allowable home-equity-loan interest deduction.

Home Sweet Home
Now you know all the home-ownership tax angles your realtor was afraid to reveal. Still, buying a home usually works out to be at least a decent proposition taxwise. And it will be much better than decent if you eventually sell for a big tax-free gain down the road. If you're married, you can potentially rake in a federal income-tax free profit of up to $500,000, or $250,000 if you're unhitched. Now that's a sweet deal!





By Bill Bischoff

My Kids Are Worth How Much?

Most parents wouldn't trade the experience of raising children for anything in the world.

If only it weren't so darn expensive. Between the medical bills, child care and college tuition, it's a wonder parenting hasn't gone the way of the wet nurse. Fortunately, the government offers some generous tax breaks to help ease the financial burden. It's up to taxpayers, of course, to take full advantage of them — and in some cases this can be difficult, since it may involve figuring out which breaks are more beneficial than others.

There are a few things parents should understand. First, most child-related deductions and credits are available whether families take the standard deduction or itemize their taxes, says Martin Nissenbaum, national director of retirement planning and taxation with Ernst & Young. Second, there's a difference between deductions and the more coveted tax credits. Don't confuse the two. A deduction, such as the tuition and fees deduction, merely decreases taxable income. A tax credit, such as the child-tax credit, allows taxpayers to subtract the amount dollar for dollar from their tax bill, or add the amount to their refund.

The most generous tax breaks come with income limits. The tax credits in particular are geared more for middle- and lower-income families. If you don't qualify for a credit or deduction, you can still save money by setting aside pretax dollars in flexible-spending accounts for medical and child-care expenses. If your employer doesn't offer these, you may qualify for one of the new health-care spending accounts. While these can't compare with tax credits, they will help cover some essential parenting costs.

Here's a brief summary of the most common tax breaks available for parents. Some of the rules can be complicated, to say the least; when in doubt, consult a tax adviser.

Deductions
Exemptions. Let's start with the basics. Every member of a household potentially counts toward a tax-deductible exemption on the family tax return. In 2007, each exemption is worth a $3,400 deduction. So a married couple with two kids qualifies for four exemptions, or a $13,600 tax deduction.

What many people don't realize is that even exemptions have income limits, warns Jackie Perlman, a senior tax research analyst with H&R Block. For 2007, the tax exemptions for married couples filing together start to phase out at adjusted gross incomes (AGI) of $234,600, $117,300 for married filing separately, and for heads of households, $195,500.

Tuition and fees. Helping a child pay for college? Uncle Sam will cut you some slack. In 2007, parents can deduct up to $4,000 in tuition expenses, provided their modified AGI doesn't exceed $130,000 for married couples or $65,000 for single parents. That deduction gets cut in half to $2,000 for married couples making between $130,001 and $160,000, and for single parents earning between $65,001 and $80,000. The deduction is wiped out entirely for those with higher modified AGIs. Parents should also note that the college tuition and fees deduction can't be used in conjunction with any other education credits, such as the Hope Scholarship or Lifetime Learning credits, which we will discuss later. Also, this tax break won't be around for 2007 and beyond unless Congress extends it (which is likely).

Student-loan interest. Even if parents set aside money for their child's college tuition, chances are they'll still need to borrow money. Thankfully, a portion of qualifying student-loan interest (loans from family, for example, don't count) is also tax deductible. The IRS allows parents to write off up to a maximum of $2,500 in loan interest. For 2007, this deduction phases out for married filers with modified AGIs between $110,001 and $140,000 and for single filers between $55,001 and $70,000. The only rule here is that students must be enrolled at least part time in a degree program to qualify. For more on student loans, see our story.

Tax Credits
Child-tax credit. In a parent's eye, a child is priceless. Uncle Sam puts the figure at $1,000, in the form of a tax credit. And unlike some other credits and deductions, the government doesn't limit how many children qualify. So if you have four little darlings under the age of 17, expect to get $4,000 swiped off your tax bill.

Like most credits, this one also has income restrictions, but they vary depending on how many children parents are claiming. The child-tax credit starts to phase out at modified AGIs that exceed $110,000 for married couples filing together, $55,000 for married filing separately and $75,000 for single parents.

Child and dependent care credit. Two-income households with children under 13 years old qualify for a dependent-care credit to help cover child-care expenses. The IRS allows working parents and those looking for a job (students and disabled parents also qualify) a credit of 20% to 35% on expenses up to $3,000 in child care for one kid and $6,000 for two or more kids. This translates into a maximum credit of $1,050 for one child and $2,100 for two or more kids.

The credit for parents earning more than $43,000 shrinks to just $600 for one child and $1,200 for two or more kids. Bernard Kent, a partner with PricewaterhouseCooper, recommends higher-income taxpayers set aside pretax dollars in an employer's flexible spending account instead. We'll talk more about these later.

Hope Scholarship credit. As we mentioned earlier, there are two education credits. The Hope Scholarship credit is for parents who are helping a child pay for college, and is worth up to $1,650 in 2007. To qualify, the young coed must be at least a part-time student in his or her first two years of secondary education. (This credit can be used only twice for each student, but there is no limit on the number of children who can qualify in any given year.) The income restrictions are a bit tighter than with the tuition and fees deduction. For 2007, this credit phases out for married filers with modified AGIs between $94,001 and $114,000, and $47,001 and $57,000 for single parents.

Lifetime Learning credit. The Lifetime Learning credit is far less restrictive than the Hope Scholarship credit. It covers students in their junior and senior years, and any other family members taking classes to improve their job skills. Here's the hitch: It can be claimed only once on any given tax return. Some families, however, will be able to claim the Hope Scholarship credit for one student and the Lifetime Learning credit for another. The latter is worth up to a 20% credit on tuition and other expenses of $10,000 or a maximum of $2,000. The income restrictions for the Lifetime Learning credit are the same as those for the Hope Scholarship credit.

Adoption credit. No one said adopting a child would be easy or inexpensive. There's the waiting game, the agency interviews and the lawyer fees. To help ease the process, in 2007 the IRS allows new parents an adoption credit worth up to $11,390. And if parents adopt a special-needs child, they can take the full credit even if their expenses totaled less than the value of the credit, says Ernst & Young's Nissenbaum. (In 2007, the credit starts to phase out when one's modified AGI exceeded $170,820.)

Cafeteria Plans
Medical costs. Whenever possible, take advantage of an employer's cafeteria plan, also known as a flexible spending account, to help pay for medical expenses. These allow employees to use pretax dollars to cover all out-of-pocket medical costs not reimbursed by a health plan. There are no income limitations. Most employers, however, limit contributions to $4,000.

Child care. As we mentioned earlier, parents earning more than $43,000 are better off signing up for an employer's dependent-care spending account. Just like the medical accounts, these plans allow taxpayers to set aside pretax dollars for child-care expenses. The IRS limit is $5,000.

The only danger with flexible spending accounts is that any money that isn't used is lost. So budget accurately. And don't forget to save those child-care receipts. Your employer probably won't allow you to simply fill out a form stating that tuition at your local daycare center is $5,000.

Divorce
Finally, you may have noticed that we haven't discussed ways divorced parents can divvy up all these tax deductions and credits. As a rule of thumb, the parent with custody for the greater part of the year gets to claim them. Of course, sometimes parents share custody, and this can get a little complicated. Whenever possible, try to work these things out early and have them noted in the divorce agreement, suggests H&R Block's Perlman. This will save everyone one less headache come April.


By Stacey L. Bradford

New Education Strategies

A tax change from 2006 potentially exposes investment income earned by your under-age-18 dependent child to the dreaded Kiddie Tax. Before 2006, the Kiddie Tax1 only affected the under-14 crowd. Why should you care? Because the Kiddie Tax rules can cause part (maybe most) of your child's investment income to be taxed at higher federal rates (possibly as high as 35%). Not good!

The unfavorable Kiddie Tax change wipes out two time-honored college-savings strategies. However, you can still save for college in at least three tax-smart ways. So life continues to be good as long as you keep your wits about you. Here's what you need to know.


Custodial Accounts and Crummey Trusts No Longer Work for College Savers

The new age-18 threshold for escaping the Kiddie Tax can greatly reduce or even eliminate expected federal income tax savings from setting up a Crummey Trust or an UGMA or UTMA custodial account to hold and invest funds intended to finance your child's future college costs.

For example, say you set up a Crummey Trust or a custodial account for your college-bound child a few years ago. You then gifted money to the trust or account and arranged for the funds to be invested. Since Crummey Trusts and custodial accounts are considered legally owned by your child, any gains or income from the investments are taxed to the child. To the extent the Kiddie Tax rules apply, however, the gains or income are taxed at your higher marginal federal rate. Not good!

Before 2006, it was pretty easy to dodge the Kiddie Tax problem by having the Crummey Trust or custodial account invest in growth stocks, tax-efficient stock mutual funds, and tax-deferred Series EE U.S. Savings Bonds. By hanging onto these investments until the year during which the child reached the Kiddie-Tax-free age of 14 (or a later year), the gains and accumulated interest income were generally taxed at rates paid by an unmarried taxpayer. This typically translated into a federal income tax rate of only 10% or 15% on interest income and only 5% on long-term gains. Sweet!

Sadly, the age-18 Kiddie Tax rule eliminates the advantage of following this "buy-and-hold" strategy — unless the investments can be held until at least the year during which your child turns 18. This is no problem for Series EE Savings Bonds, because they have no investment risk. But it's generally a bad idea for equity investments. You probably don't want to be forced into holding onto these more-volatile issues until right before your child's college bills start coming due.

If the Kiddie Tax problem isn't reason enough to give the cold shoulder to Crummey Trusts and custodial accounts, there's more. Funds in a custodial account will fall under your child's legal control after he or she reaches the state-law age of majority (usually 18 or 21, depending on where you live). Somewhat similarly, funds in a Crummey Trust will eventually have to be dished out to the child under terms that were established when you set up the trust. In other words, once you've contributed money to a child's Crummey Trust or custodial account, you can't get it back. It must be used for the benefit of that child.

Bottom Line: Please take my advice and forget all about establishing a Crummey Trust or an UGMA or UTMA custodial account as a college-savings vehicle. Before 2006, they had tax advantages that made them worth considering. Not anymore.


The Good News: These Three Strategies Still Work Just Fine!

While the Kiddie Tax age-18 rule makes Crummey Trusts and custodial accounts unworthy as tax-smart college-savings vehicles, you still have other attractive choices. Here are the top three, in order of how well I think they work.

Tax-Smart Option No. 1: Contribute to a 529 College Savings Account
Section 529 college-savings accounts have a great big tax advantage. Briefly, these state-sponsored programs are allowed to accumulate income and gains free of any federal-income-tax hit. When the account beneficiary (your child) begins his or her college career, federal-income-tax-free withdrawals can be taken out of the account to cover qualified education costs. Most, if not all, Section 529 plans now accept contributions of over $250,000. So you can fund the entire cost of an expensive education with a Section 529 account. Better yet, there are no income restrictions. These tax-smart college savings vehicles are available even to the "rich."

When funneling gobs of cash into an account intended for a your child's college costs, I think you should be quite concerned about what will happen to your dough if things don't go as expected. After all, your kid could decide to focus on body surfing instead of higher education. Happily, a Section 529 account gives you admirable flexibility to deal with such things. Specifically...

  • You're allowed to change the account beneficiary without any adverse federal-tax consequences — provided the new beneficiary is a member of the original beneficiary's family and in the same generation or an older generation. So you effectively can take money out of a Section 529 account established for one child and move it into an account set up for another child, or even into an account set up for yourself without running up a bill with the IRS.
  • Should you need to get the Section 529 account balance back into your own hands, that's permitted, too. You can pull back all or part of the money. However, you'll owe federal income tax, plus a 10% penalty on any withdrawn earnings. No tax or penalty is due on withdrawn contributions. That's a reasonable price to pay for being allowed to recover the money.

Warning: The preceding explanation describes what the federal tax law allows. Most Section 529 college-savings plans conform to these guidelines, but they are not required to do so. Make sure any plan you're considering does conform before making any contributions. For more information on Section 529 college savings plans, including state-by-state comparisons, I strongly recommend visiting savingforcollege.com2.

Tax-Smart Option No. 2: Contribute to a Coverdell Education Savings Account
Provided your modified adjusted gross income (MAGI) isn't too high, you can make annual contributions of up to $2,000 to a Coverdell Education Savings Account (CESA) set up for a child under 18. What's a CESA? It's an account set up by a "responsible person," which means you, to function exclusively as an education-savings vehicle for the "designated account beneficiary," which means your child. If you have several children, you can contribute up to $2,000 annually to separate CESAs set up for each one.

While CESA contributions are nondeductible, the account's income and gains are permitted to grow free of federal income tax. Then, federal-income-tax-free withdrawals can be taken out later to pay for your child's college tuition, fees, books, supplies, and room and board.

There's one big catch: Your right to make CESA contributions is phased out (gradually eliminated) between MAGI of $95,000 and $110,000 if you're unmarried or use married-filing-separate status. If you're a married joint filer, the phase-out range is between MAGI of $190,000 and $220,000. Fortunately, it's often pretty easy to work around this restriction. Here's how: If your MAGI precludes contributions, you can recruit another individual who has MAGI below the magic number to act as the "responsible person." Then that person can set up and make contributions to your child's CESA. For example, you may be able to enlist your parent to be the responsible person for your child's CESA. If so, you can simply give your parent the money each year to make the desired annual contributions to your child's account.

Now for a few more ground rules. CESA contributions are prohibited after the account beneficiary (your child) reaches age 18. If the CESA still has a balance after your kid hits turns 30, the account must be liquidated and all the money distributed to him or her within 30 days. But there's often a better solution. The "responsible person" (presumably you) can roll over the account balance tax-free into another CESA set up for a new beneficiary who is under age 30 and a member of the original beneficiary's family, like one of your other children.

The rollover privilege effectively allows you to use CESA funds for another beneficiary's education costs if the original beneficiary doesn't attend college or turns out to not need the money (perhaps because of scholarships). However, once you plow contributions into a CESA, you can't get the money back for yourself. Also, you lose all control over the account if you have to recruit someone else to be the responsible person. These two negative considerations don't apply to Section 529 accounts, which give us two more reasons to like them better.

Tax-Smart Option No. 3: Save With Your Own Taxable Brokerage Firm Account
You can keep things really simple by saving and investing for your child's college costs in your very own taxable brokerage-firm account. The maximum federal-income-tax rate on long-term capital gains and qualified dividends is locked in at only 15% between now and the end of 2010. This is a pretty good deal.

What if you still have some appreciated shares in the college account when your child hits college age? Consider giving some to the child. He or she can sell the shares, pay the capital gains tax hit at a lower rate (probably only 5% or less), and use the money for college. If your college account has some shares that have dipped below cost, you can sell them and claim the resulting capital losses on Schedule D of your Form 1040. Then use the cash to pay for college.

The Bottom Line
While the age-18 Kiddie Tax rule shuts some college savings doors, others remain wide open. The three options explained here are your best tax-smart choices in the current environment. Please take advantage.

Links in this article:
1 smartmoney.com/taxmatters/index.cfm?story=20060711
2 savingforcollege.com

By Bill Bischoff