 Year
End Tax Reduction Tips
There are many things you
can do this month that can reduce your 2006 and/or 2007
tax bill.
Here’s a bakers dozen year end tax saving strategies you
should consider:
1. Consider refinancing your mortgage this year. Loan fees (i.e.
points) are
supposed to be deducted over the projected life of
mortgage, but when the loan is paid off early in order to
refinance, any remaining points not yet deducted can be
deducted in that year. Mortgage refinancing can be a smart
move for those of us with higher mortgage interest rates
and/or who want to replace an adjustable mortgage with a
fixed rate product while rates are still low. In addition,
if your home has appreciated since its purchase and you are
currently paying for private mortgage insurance, you may no
longer be required to carry it if your refinanced loan
amount is less than 80% of the home’s current appraised value. Also,
if you have had your current loan for some time, a larger
portion of your monthly payment applies to the principle, so
you have less interest to deduct than you had when you first
got the mortgage. If you are among the fortunate who could
use additional tax deductions, refinancing your home will
mean you’ll have a bigger interest deduction every month,
even if your payments stay about the same.
2. Make your January mortgage payment in December. You’ll be
able to deduct the interest on that payment in 2006. Keep in
mind that you’ll have less mortgage interest to deduct in
2007, however. This can also work for your 2007 property tax
payments, if they are not paid by your mortgage lender and
your local real estate tax authority allows early payment.
3. Take deductions for any casualty or theft losses that were
not covered by insurance or paid by others. Go to
http://www.irs.gov/individuals/index.html for
limitations on this deduction as well as advice on other
possible deductions.
4. Take deductions for moving expenses that aren't
reimbursed if you or your spouse changed jobs and moved to
another home in 2006. To qualify the new place of business
must be at least 50 miles from your old place of business.
The commuting distance from your old home to your old job
must be added to that amount.
5. Consider starting a full or part time home-based business
in 2006. Working at home sure beats commuting, and
technology tools such as the Internet are making the
physical location of the business less relevant (millions of
homeowners are now earning a full or part time income as
eBay merchants for example). Portions of the home used in
business may be depreciated and portions of the cost of
maintenance may be deducted. Additionally, section 179 of
the Internal Revenue Code allows home based and other small
businesses to expense capital equipment costs in their year
of purchase (up to $108,000 in 2006). If, for example, you
will need to make capital investments in computers,
software, a vehicle, etc. to get your business off the
ground, you’ll be able to write off the entire amount that
year even if you finance the purchases. Keep in mind however
that other IRS regulations require that your new business
show an annual profit with sufficient frequency, or else you
may lose the tax deduction retroactively.
6. Review your 2006 medical expenses and consider those
likely to come up next year. If you have medical insurance
and have used up your deductible, or have a medical
reimbursement plan and haven't spent as much as you'd
planned, consider visiting your doctor, dentist,
optometrist and/or ophthalmologist before the end of the year.
You may also be able to prepay some of the costs of future
elective surgery this year and take the deduction for those
payments in 2006.
7. Review your federal and state tax withholding. If you
have been getting big tax refunds every year there is a
hidden downside. It means that you have been lending the
government your money throughout the year at a 0% interest
rate. If you ask your employer to increase the number of
your deductions, you will have more cash in future paychecks
throughout the year to save or invest. Be sure that you
don’t take too many additional deductions however - there is
a stiff tax penalty if you underpay your tax by more than a
modest amount. The best strategy may be to take enough
deductions to approximately break even on your annual
federal and state taxes. That way you will minimize the
amount you lend Uncle Sam interest free and also limit the risk
that you’ll be in a penalty situation if your estimates are
a little off.
8. Think about making more charitable deductions in 2006. In
2007 documentation requirements will be greater and there
are new limitations on the valuation of charitable gifts
like automobiles and artwork to reduce abuses in that area.
9. Review your employer’s benefits. This is open enrollment
time for many corporate and government employees. Review
your coverages and options, and update your benefit choices
based on your current personal and family needs. Remember to
take into account any changes you're expecting in your life
next year, such as a family addition or specific major
medical needs. And make sure you don't miss your employer's
deadline.
10. Review your investments. Is it time to change things
around? Capital losses offset capital gains, so if it’s time
to take your profits in one capital investment, such as a
rental property or stock held more than a year, consider
offsetting the profits by selling other capital investment s
which have lost value.
11. If you can afford it, make sure to maximize your 2006
annual contributions to your IRA, 401k, or Roth account, at
least up to the tax deductible ceiling for that account.
Also many older workers are also eligible for additional
“catch up” contributions beyond those ceilings.
12. Use Google to find numerous additional year end tax tips
on a variety of topics. Several related to home ownership
include: Tips on Deducting Loan Points - The Motley Fool;
Divorce and home sale gains - Bankrate.com; Don't overlook
the tax breaks of home mortgage points - Bankrate.com; and
Computing the basis of a personal residence - Bankrate.com.
A directory of even more tax tip websites is at
http://www.taxsites.com/help.html
13. A final word of caution: the alternative minimum tax
(AMT) is affecting more and more taxpayers. In some cases
year end tax reduction strategies may not be effective
because of deduction limitations in the AMT. Before
implementing end of year tax reduction steps, do a
preliminary 2006 tax calculation to see if you will already
fall under the AMT in 2006. If you do many otherwise useful
tax avoidance techniques will be useless. The AMT law is
complex, so see your tax advisor, check some of the
aforementioned tax tip websites, or call IRS for advice
(800- 829-1040) if you’re not sure what to do.
Feds
Score More Wins for Homeowner Rights
The U.S. Department of Justice, the Federal Trade
Commission, and the Office of the Comptroller of the
Currency are closing out 2006 with successes in their
ongoing efforts to protect the rights of homeowners.
The Federal Trade Commission (FTC) is on a roll in its
efforts to stop multiple listing services from blocking the
dissemination of listings of homeowners who use discount
brokers. Local multiple listing services, which are groups
of local real estate brokers originally formed to facilitate
sharing of home sellers listings between each other, have
expanded their function in the Internet era. In addition to
this traditional function, they have also evolved into
public utilities for the sharing of homeowners’ listings
directly with home buyers through the consumer-facing
websites of each of the MLS member brokers and their
national association’s website. With 80% of home buyers now
using the Internet in their home searches, disseminating
home sellers listings through this network is an absolutely
critical marketing step. However, many MLS’s have created
rules that enable the full commission brokers to keep the
listings of homeowners who use discount brokers off that
network.
This violates antitrust laws, and the FTC has threatened to
sue MLS’s that discriminate against their members who offer
discounts and the home sellers who use them. Faced with an
almost certain loss in court, in early November five MLSs
agreed to abandon policies that blocked discount broker’s
property listings from reaching public web sites. At the end
of the month one of two additional pending FTC complaints
was withdrawn pending a proposed settlement agreement with
that MLS. The FTC is proceeding in its case against a
remaining Michigan MLS owned by several Realtor boards and
associations. “Our hope is that the remaining case does not
settle”, said American Homeowners Grassroots Alliance
President Bruce Hahn. “We think that FTC has a very strong
case, and a clear ruling against this practice will make it
easier to shut down any remaining violators in the future”.
The Justice Department (DoJ) also got a boost in late
November when the Illinois Federal District Court refused
the National Association of Realtor’s (NAR’s) petition to
dismiss DoJ’s antitrust case against it. NAR represents the
interests of traditional full commission brokers. NAR has
proposed industry operating practices that appear intended
to handicap discount real estate brokers who offer consumers
less expensive alternatives to the full commission business
model that NAR’s leadership seeks to protect.
DoJ is suing NAR to force it to abandon its proposed
anticompetitive industry regulatory policies. The Court
found that DoJ had adequately alleged a Sherman Act Section
1 violation and that the government's allegations were
sufficient to establish continuing adverse effects. DoJ has
identified 36 market areas where NAR policy for the online
display and sharing of home listing information has
allegedly caused anticompetitive effects, according to NAR
general counsel Laurie Janik.
The outcome of the case may be the prohibition
of practices connected with the illegal actions, such as the
“selective opt out” contained in NAR’s initial virtual
office website (VOW) policy. The Court observed that the
"Defendant concedes, for present purposes at least, that the
challenged VOW policies and rules are the product of a
'combination among NAR's members,' which is a prerequisite
for the practices to be actionable under Section 1 of the
Sherman Act." In the decision the judge also noted that "a
group of market participants cannot immunize 'arrangements
or combinations designed to stifle competition . . . by
adopting a group membership device accomplishing that
purpose", and that NAR can enforce adoption of its rule
with sanctions. Therefore is unlikely that NAR will be able
to avoid liability by arguing that the individual brokers
are the ones who decide whether to opt out or not.
State bank regulators in at least seven states are moving
quickly to adopt guidelines modeled after the
recommendations of the U.S. Office of the Comptroller of the
Currency. Georgia, Idaho, Iowa, Massachusetts, Montana, New
Hampshire and Wyoming have announced that they will adopt
identical guidelines directing lenders to tighten their
nontraditional mortgage underwriting standards and provide
more complete disclosure of nontraditional mortgage loan
terms to consumers. Nontraditional mortgages include
interest-only and payment option, negative amortization
loans. The federal guidelines apply to federally chartered
banks but not to state-regulated banks and mortgage lenders.
Federal officials also urged states to issue similar
guidelines to ensure that all lenders are competing on an
even playing field. In response the Conference of State Bank
Supervisors and the American Association of Residential
Mortgage Regulators created the state guidelines now being
issued at the state level. “This is a positive development”,
according to American Homeowners Foundation President Bruce
Hahn. “Foreclosures on nontraditional mortgages are
increasing, so it’s clear that many of the growing number of
home buyers who use them are financially unprepared for
them. These reforms will help limit their use to home buyers
who both understand nontraditional mortgage implications and
have the wherewithal to afford their risks”.
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Democratic Congressional Agenda Friendly to Homeowners
Many of the expected early initiatives of the upcoming
Democratic Congress will be very beneficial to the nation’s
homeowners.
Democratic leaders have made a wise tactical decision to
focus on an early legislative agenda that already has a
broad base of support among the public. Many of the issues
have a significant impact on the average homeowner’s
pocketbook. Unlike earlier generations of homeowners,
today’s homeowners have a much more difficult time getting
ahead of basic living expenses. Raises from employers are
smaller, and for many younger families today home ownership
is impossible unless both spouses work. At the same time,
annual double digit increases in essential expensive costs
like health care are keeping most homeowners in a perpetual
state of tight personal budgets.
With family health insurance costs up 70% (to $4,500 per
family) since 2000, and 6 million families losing their
health insurance since then, there is broad public support
for cost-effective improvements to the Medicare prescription
drug program and ending expensive previous concessions to
drug companies and HMOs. An expected effort to make college
tuition tax deductible, permanently, cut student loan
interest rates, and expand Pell Grants will be welcomed by
cash-strapped parents as well.
Environmental initiatives are also broadly supported,
although their economic savings will take time to
materialize. Legislation to reduce dependence on foreign oil
and create a cleaner environment, with more research funding
for energy-efficient technologies and domestic alternatives
such as biofuels, are also potential winners with
homeowners, who are increasingly pressed by increases in
home energy costs, automotive fuel costs and the impact of
growing energy costs on the products and services they buy.
While these issues are popular with homeowners, most
homeowners are also fiscal moderates. A factor in their
support will be the budget impact of these initiatives, and
the Congressional Democrats’ ability to find ways to pay for
new benefits through such avenues as reduction in Iraq war
expenditures, increasing tax rates on the truly rich,
reduction of tax incentives for oil companies, or other
acceptable solutions.
The Democratic Congressional strategy will also mean that some issues
specifically affecting
homeowners will have to wait in line for their turn. However
Democrats in general have historically been supportive of
efforts to help the middle class and protect consumer
rights. When our turn comes there is an increased likelihood
that Congressional leaders will be willing to intercede on
homeowners’ behalf when the opportunity arises. Some of the
things that the American Homeowners Grassroots Alliance
would like to see addressed in the new Congress include:
●
More hearings on abuses in the real estate services sector,
and specific legislation to address them. These abuses include
discrimination against the use of discount real estate
brokers, state laws against commission rebates, undisclosed
kickbacks and conflicts of interest, abuses in the title
insurance industry, and the misuse of eminent domain
procedures as a tool for commercial real estate developers
to seize private property.
●
Extension of expiring tax laws significant to home ownership
(tax credits for investments to make homes more energy
efficient, the construction of energy efficient new homes,
and low income housing), as well as the creation of new tax
incentives to stimulate home ownership (deductibility of
private mortgage insurance, a first time buyers tax credit,
improved tax incentives for business use of the home and teleworking, and tax incentives to provide rural residents
and disadvantaged citizens access to affordable broadband
services at reasonable prices).
●
Expansion of home ownership through Federal housing programs
that help qualified low-income families accumulate the down
payment to purchase a home, creation of a national housing
trust fund to build rental housing for the lowest income
families, and preservation of the ability of government
sponsored enterprises (Fannie Mae, Freddie Mac) to provide
favorable financing to homeowners.
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Buyers in the Drivers
Seat
 The
slowing real estate market and the Internet are putting
buyers in the driver’s seat, giving them many ways to take
advantage of their bargaining power.
The oversupply of homes on the market in many areas means
that home buyers can bargain hard on price. There are
growing numbers of foreclosures today, and buyers who can
master the foreclosure market may soon see some outstanding
bargains if the trend continues. Foreclosed properties
accounted for 3.1% of all home sales in the first half of
2006, up from 2.4% in 2004, according to a First American
Real Estate Solutions study. Lenders stuck with foreclosed
property are becoming more inclined to cut prices or sell
properties through auctions, according to industry experts.
Home buyers have other new advantages as well. The Internet
has enabled home buyers to research the inventory of homes
on market easily and at their own convenience, thereby
reducing the work of buyer’s agents and buyers brokers. Much
of this is due to the creation of public websites by most
real estate brokers and the supply of listings to those
websites by the brokers’ local multiple listing services. In
some cases buyer’s agents may be willing to rebate portions
of their commission to home buyers willing to do more of the
work. This won't work everywhere - in order to maintain high
commissions real estate trade associations in some states
have passed anticonsumer laws prohibiting rebates.
The Internet is also helping buyers better understand the
process. Websites of independent nonprofit consumer education
organizations, such as the American Homeowners Foundation (www.AmericanHomeowners.org)
as well as federal and state governments, offer free
objective information to help home buyers better understand
the many nuances of home purchase.
Home buyers may find that they don’t need a real estate
agent to make an offer in some cases, for some types of real
estate listings permit the home seller to deal directly with
the buyer. This can save a sophisticated buyer half of the
typical commission, but it’s not always the wisest course of
action for unsophisticated home buyers. “Hiring an
experienced exclusive buyers agent (EBA) is a wise decision
for home buyers who don’t have the full array of skills
needed in the purchase of a home”, noted American Homeowners
Foundation President Bruce Hahn.
“Experience is critical – entry standards for the real
estate profession are minimal across the board. No consumer
on either side of the transaction is likely to be well
represented by a newbie real estate agent whose only
qualifications are a couple of weeks of coursework.” The
Foundation also recommends that home buyers interview
several prospective EBA’s to get a better understanding of
their experience, strengths and qualifications before making
a selection (an interview form is in the Foundation book,
The Complete Home Buyers Guide, available in libraries, at
www.AmericanHomeowners.org, and from bookstores).
Home buyers should try to avoid buyers agents whose firms
also represent home sellers. When that happens the same firm
could find itself representing opposing parties in the same
transaction, thereby creating a conflict of interests. If there’s not an EBA in your area the next
best alternative is to seek out an experienced agent with an
established and respected small local broker rather than a
large company or franchise. Smaller independent brokers will generally have fewer
listings than their larger competitors, and that way there
will be less chance that the home of your choice will turn
out to be one of that broker's listings.
Some buyers may continue to sit on the sidelines in hopes of
further drops in real estate prices. First American Real
Estate Solutions expects a slightly higher foreclosure rate
and deeper price reductions next year. However the larger
the supply, the greater the selection and the greater a
buyer’s negotiating leverage. The current supply of homes
for sale is quite large. Home builders have drastically cut
back on new home starts, and the overall supply is unlikely
to expand much further. The large current supply greatly
increases the chance that you can find the perfect home
today. Buyers should also be able to negotiate a very good
price through hard bargaining, so it may not be worth
waiting for further price drops, especially if they turn out
to be minimal.
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Newest Threats to Homeowners Related to Income
Several recent trends threaten homeowners, but the risks
have much to do with how much you make.
Home foreclosures are increasing for a number of
reasons. The decline in home values is leaving more
homeowners “upside down”, owing more to their lender
than they can hope to yield from the sale. Homeowners at
the lower end of the economic scale are often trapped
because they don’t have enough cash to make up the
shortfall when they need to sell. More than one million borrowers have faced
foreclosure so far this year, up 27% from the same
period last year, according to online foreclosure-data
service RealtyTrac.
In recent years many lenders have lowered their
standards for subprime mortgages, which carry higher
interest rates in order to offset the higher risks
associated with borrowers with flawed credit histories.
Less wealthy homeowners have
also increasingly resorted to using exotic mortgage loans that feature
very low initial payments. Previously the use of such loans had
mostly been limited to wealthier and more sophisticated
homeowners who had ways to invest the mortgage interest
savings in a very productive fashion, often in their own
businesses or the stock market. The wealthier homeowners
have the option of being able to refinance if necessary,
regardless of changes in mortgage interest rates.
At the other end of the scale, homeowners unable to make
their mortgage payments are increasingly victims of
"foreclosure rescue" scams. There are increasing numbers
of homeowner complaints of fraud by lenders and/or
intermediaries that purport to help financially
distressed borrowers seeking to avoid foreclosure.
Several states have already passed laws to provide more
protection against dishonest businesses trying to take
advantage of vulnerable homeowners.
The worst offenders are some of the foreclosure-rescue
companies, who offer quick fixes to homeowners behind on
their mortgage payments. In some cases the companies
have been accused of deceiving borrowers into believing
they can save their homes from foreclosure in exchange
for a temporary transfer of the deed with a leaseback.
However, sometimes the foreclosure-rescue companies sell
their homes to a third party, keeping the home’s equity
and leaving the former owners without the right to
repurchase their home.
Ten states have enacted legislation to deter
foreclosure-rescue fraud: California, Colorado, Georgia,
Illinois, Maryland, Minnesota, Missouri, New York, Ohio
and Rhode Island. The legislation gives homeowners the
right to cancel the "rescue" transaction up to a set
number of days before the closing. In Illinois
legislation addressing this issue, a company buying a
property in foreclosure and leasing the property back to
the homeowner with a buy-back option is, in some cases,
required to pay the homeowner at least 82% of the
property's fair-market value. The American Homeowners
Grassroots Alliance supports the passage of similar laws
in the remaining forty states.
Another problem can occur with foreclosure consultants
who promise borrowers they will negotiate with their
lenders to delay or avoid foreclosures for a prepaid
fee. While legitimate nonprofit organizations provide
such services for free or modest fees, the scam
foreclosure consultants charge large fees in advance and
frequently do nothing. The American Homeowners
Foundation recommends that homeowners facing foreclosure
check a foreclosure consultant’s record with their local
Better Business Bureau or government consumer protection
agency. Either may also be able recommend reputable
foreclosure consultants before making a decision.
While wealthier homeowners may feel smug in the
knowledge that they probably will never have to face
foreclosure, they face a growing problem that has far
less effect on their poorer brethren. The problem is
lightening, which is God’s way of telling wealthier
homeowners that they have too many fancy electronic
toys. One lightening bolt is perfectly capable of
simultaneously frying a $5,000 plasma TV, the home
theatre it’s connected to, the stereo system, every
plugged in game console and computer in the house, the
hard-wired home-alarm system, the HVAC system, and the
telephones.
The damage from a lightening strike on a home can be
devastating. Not only does it leave many 21st century
family members with no other alternative but to talk to
each other, but the costs and inconvenience are
substantial, in part because the greater numbers of
appliances overloaded by lightening also pose additional
fire hazards. According to the Hartford Insurance
company, the cost of homeowners' claims for damage due
to lightning rose 77% between January 2001 and July 2006,
despite the fact that the number of claims during that
time dropped by nearly half. Other home insurers have
reported similar experiences.
Although most homeowner's insurance policies cover
lightening damage, most policies also have a deductible
amount. With the balance sheets of many insurers still
in damaged condition after Hurricane Katrina, any
insurance claim is likely to lead to an increase in your
homeowners insurance rates. Then there’s the inconvenience of
having to schlep around and replace all that hardware.
Most of the threat from lightening can avoided with the
proper precautions. Newer homes are required by building
codes to have a lightning-protection system, usually
described by their largest component, which is
the lightening rod itself. Unfortunately
lightning-protection systems are not always installed
properly. Older homes can be retrofitted with lightening
rods, and there are additional steps you can take as
well. A whole-home surge arrestor installed between your
home's electrical source and the
main circuit-breaker panel or the electric meter should
block electrical surges from lightening and other
sources. Most electricians who install them can also
tell you whether your current lightning-protection
system, if you have one, is up to snuff.
An alternative to a whole-home surge arrestor are the
relatively inexpensive portable surge suppressors that
you plug into electrical outlets. The portable surge
suppressors offer some protection to appliances that are
then plugged into them. Surge suppressors have UL
standard 1449 label and have a suppressor voltage rating
of 330 volts or better. Portable surge suppressors can
also be wiped out by lightening, but many have self
contained circuit breakers as well as indicators that
tell when they are broken.
Another preventative step is to simply unplug electrical
devises during electrical storms. However not all
electrical storms give much advance warning, and with
growing numbers of electronic devices in many homes,
shutting all of them down, unplugging, replugging and
rebooting can be quite a chore. For that reason erecting
an effective full time defense against lightening
strikes is a good investment. Do that, and the next time
there’s an electrical storm in your neighborhood, you
can relax and enjoy your home theatre while it passes
over (but don’t opt instead for a nice hot shower -
you’re not supposed to shower or bathe during an
electrical storm).
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Are any of the policy issues in this month's Home Base of
interest to you? If so, please take the time to contact your
legislator and express your views. It's easy - you can reach
your legislator by email in a couple of mouse clicks, and
you can use the content in Home Base and elsewhere on our
website to help you develop your message. To look up the
phone number, email, and/or postal address of your U.S.
Representative or your two U.S. Senators,
click here. The
site can look them up by zip code for you if you don’t
recall their names.
Many legislators are also happy to meet personally with
their constituents when they are back home on weekends or
when Congress is not in session. A personal meeting is a
particularly effective way to get their attention and
reinforce your message, so please consider also requesting a
follow up face-to-face meeting in their home state or home
district offices near you when you contact them on policy
issues.
Is there a policy issue that is particularly important to
you which significantly impacts homeowners or home
ownership? Any member may propose a position on a policy
issue, so please check the American Homeowners Grassroots
Alliance's 2006 policy priorities to see whether it’s
already on our list. If it isn't on the list, we invite you
to send us an email and tell us why you think the American
Homeowners Grassroots Alliance should be working on it.
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