If instituted, a home renters tax credit would help offset the burden of soaring rents. (Photo Credit: CC BY-ND/Hardy's Hill House)

The U.S. housing market has scared off many potential home buyers, sending them toward home rentals. The increased demand has made it significantly more difficult for low-income families and individuals to take advantage of lower rents, a problem the Obama administration recognizes. As a means of relief, legislators are currently exploring the idea of instituting a home renter’s tax credit as a part of a larger overhaul of the tax system, reports MarketWatch.

The rent is too damn high

A recent Harvard university study found that about 26 percent of renters – 10.1 million people – spent more than half of their pre-tax household income on rent and utilities in 2009. This can be attributed to stagnant or retarding wages brought on by the recession, which is a bad place to be when rents continue to rise. U.S. Housing and Urban Development Secretary Shaun Donovan believes there needs to be a way out for struggling tax payers searching for residency, and the home renter’s tax credit is an idea that is gaining traction.

Boosting government support for home renters is an idea “that is worth looking at,” according to Donovan. If such a rental housing tax break were to be instituted, it would require adjustments to other parts of any new U.S. tax code in order to avoid unnecessary addition to the federal deficit.

Homeowners receive tax credit love

Consumers who own their own homes currently are able to reap the benefits of government subsidies through tax deductions of mortgage interest payments and property taxes. In addition, mortgage buyers Fannie Mae and Freddie Mac have received ample federal support through taxpayer bailouts.

In 2009, the government granted $230 billion in subsidies for homeowners, reports the Congressional Budget Office. Over that same period, home renters received only $60 billion.

Sources

MarketWatch

U.S. Department of Housing and Urban Development

Washington Post

Renting a home vs. buying a home: Do the math

Tax reform proposed by the deficit commission would raise taxes from more sources so everyone could pay a lower tax rate. Image: CC Wikipedia

The tax cut deal that has dominated the news this week has brought the issue of tax reform to the forefront of the political agenda. Tax reform would involve simplifying the complex maze of deductions, credits and exemptions in the tax code. In theory, tax reform would allow the government to collect more taxes while lowering tax rates.

Tax reform and the deficit commission

Tax reform is a key element of a report submitted Dec.3 by the Obama administration’s bi-partisan deficit commission. In searching for ways to reduce the federal deficit, the deficit commission laid out a radical idea. Instead of raising tax rates on individuals and businesses to raise more revenue, the deficit commission suggests reducing or getting rid of myriad tax breaks that end up costing the government $1 trillion every year. To compensate for less generous deductions, the tax rates paid by everyone would fall significantly. This would be affordable, in theory, because eliminating a majority of tax breaks would create a broader tax base.

How tax reform could work

Economists agree that tax reform would make the U.S. economy more efficient. The complexity of the current tax system directs the country’s resources based on tax breaks, instead of what is most productive. The deficit commission plan would eliminate tax breaks except for those applying to children, families, charities, health insurance and home mortgage interest. In return, the top tax rate would drop from 35 percent to 29 percent. The cost of filing federal tax returns, about $140 billion a year, would also drop and that money — about 1 percent of the U.S. economy — could be spent in better ways.

Why tax reform won’t happen

The hardest part of tax reform for the political system would be figuring out how much money needs to come in. Democrats and Republicans have agreed with the deficit commission about a broader tax base and reduced tax rates. However,they have never been able to agree on the size of government. While Democrats could be expected to use the tax code to pay for government, Republicans can be counted on to use tax reform as a scheme to shrink government. With special interests marshaling forces ahead of the 2012 election, a reasonable person would expect no meaningful tax reform to happen in the near future.

Sources

New York Times

Washington Post

CNNMoney.com

The Bush tax cut deal includes across the board benefits, but the generosity of the tax breaks goes up with income. Image: CC iBjorn/Flickr

Coverage of the Bush tax cut deal proposed by the Obama administration this week has focused on tax cuts for the rich. But the tax compromise contains other provisions that would benefit ordinary Americans, depending on how well off they are. Economists are praising the deal as a stimulus package once thought impossible after the midterm elections.

Inside the Bush tax cut deal

The Bush tax cut deal will cost the federal government nearly $900 billion dollars over the next two years. A great deal of that money will go to people who could live very comfortably without it. But what is left of the middle class stands to benefit from such items as a payroll tax holiday, child tax credit, a tuition tax credit and a federal unemployment extension carrying through 2011. If the Bush tax cuts had expired as planned, middle class taxpayers would be taking home up to $200 dollars less on payday starting next month. Lower-income Americans would have seen their payroll tax rate rise from 10 percent to 15 percent.

More tax cuts for the rich

There’s something for everyone in the Bush tax cut deal. But the benefits are skewed toward the rich. The payroll tax holiday takes two percentage points off the current 6.2 percent taken out of paychecks. Someone making $100,000 would get a tax cut ten times bigger than someone making $10,000. Census data shows the average U.S. family earns about $52,000 a year. A Bush tax cut extension will save these households $1,180 on average in 2011–about 2.3 percent of income. Families earning from $200,000 to $500,000 would save about $7,500. Taxpayers making $1 million and more, about $129,000 — nearly 6.2 percent of income.

Where the money goes

Broken down into Republican and Democratic wishes, the Bush tax cut deal favors the latter. Of its $900 billion cost, just $120 billion goes to tax cuts for the rich. Tax breaks proposed by the Obama administration take $450 billion from the total. The Bush tax cut extensions for the middle class will cost $360 billion. Economists are praising the deal. Analysts revised estimates for economic growth and employment upward on the news. Liberal research groups in Washington said the Bush tax cut deal will do more to create jobs than anyone hoped with Republicans in control of Congress.

Sources

CNNMoney.com

MainStreet

New York Times

In a brief instance of cooperation under the Capitol dome, a small business bill was actually approved in the Senate. Image: CC Greg Palmer/Flickr

Few who understand Congress expected lawmakers to succeed in passing a small business bill before the November midterm elections. But two Republican senators who are not seeking re-election crossed party lines to give Democrats the votes they needed. After a summer of partisan bickering, the Senate passed a small business bill Thursday. The legislation aims to improve access to credit and provide tax relief for small businesses, which policymakers say create a majority of new jobs. The bill now heads to the House, where it is expected to quickly pass.

Small business lending and tax breaks

The small business bill that finally passed the Senate Thursday features the creation of a $30 billion lending fund directed to regional banks for small business lending. Republicans called the fund another taxpayer bailout like the Troubled Asset Relief Program. However the Wall Street Journal reports that unlike TARP, banks actually volunteer to participate in the new small business lending program. The interest rate banks are charged for the money is tied to how much they use it to increase their small business lending. The small business bill also includes about $12 billion in business tax breaks, including an immediate write-off of 50 percent for new equipment purchases in 2010 for all businesses. The amount of new investment that small businesses are allowed to expense in 2010 and 2011 will double to $500,000.

Retiring Republicans choose principle over party

The House passed a version of the small business bill earlier this year. The Los Angeles Times reports that business entities expected to support the bill, including the U.S. Chamber of Commerce and the National Federation of Independent Businesses, instead chose to use the legislation as a vehicle to weaken the new healthcare reform law. Republicans filibustered the small business bill in July, demanding the to add amendments unrelated to the objectives of the legislation. At one point, frustrated House members staged a sit-in at the Senate chamber to protest the delays. Finally months of partisan gridlock were overcome by Republicans George LeMieux of Florida and George Voinovich of Ohio, senators who are not seeking re-election. They joined 57 Democrats and two independents to pass the measure 61-38.

A simple way to save

Many operators have advertised 529-college savings plans as a “simple way” to save. The reality is that nothing about the plan is simple. In fact, parents need to educate themselves with regard to what their state’s tax laws are regarding the accounts. Then, within the accounts there are outrageous options to pick from. Do parents want a conservative option? An aggressive option? A combination of the two? The answer to that depends on how much time they have to save. Savingforcollege.com noted in a recent post that there are more than 3,000 possible investment options with 529 accounts.

The other thing to remember with 529 accounts is that there is no singular way to report results. Because of this, parents who want to comparison shop before they choose a plan need to be ready for some heavy-duty research. There are some websites that offer insight like Morningstar.com or Savingforcollege.com, but parents will still have to understand the calculations to truly compare different savings options. Of course there are financial advisers that will do the work, but they come along with a hefty commission, and the expense can eat away at the quick cash parents were hoping to put into education savings.

But the tax breaks are worth it

Another advertised special of the 529-college savings plan is that the tax breaks are abundant. In reality there are a lot of advantages tax-wise, but they benefit only if the account has gains. For people who opened their accounts right before the recession, there may be few gains to speak of. The past few years were not good ones for anyone looking to invest. Many people holding just-opened 529-savings plans have losses. With a top capital-gains tax rate of 15 percent, parents need to make outstanding gains for any tax savings to be realized.

529-college Savings Plans are great for everyone

Just like all investments, the 529-plan is not for everyone. The main virtue of the plan comes to fruition for parents who have a lot of time to work on them. Parents with only five years to save may find other investment options offer a quicker return and are more aggressive savings vehicles. On the other hand, parents who start a college savings account when children are born can benefit from 529-plans. The plan has a long enough time span to regulate out any downturn in the economy and overcome the ups and downs of stocks and bonds.

Deciding on the 529-college savings plan

The 529-plan is a great option if parents meet certain qualifications. Time and luck can play a big part in how much a parent is able to save over the years. Though the savings plan has its benefits, it isn’t always the sure-fire way for quick cash. Parents should consider their personal situation and then make the best decision for saving money for their children’s college education.

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“But where do I put the money?”

There are so many options out there that can make it confusing as to which option or options will be best for you. Let’s focus on one option, the 529 Plan, which every parent needs to know about and understand. When considering how you should invest your money, I hope that I will, by the end of this article, have outlined a new option for you. With the tax breaks helping you avoid tax debt, flexibility and ease of use, the 529 Plan should be at the very top of every parent’s list of financial options when they start researching for their child’s college education fund.

The 529 Plan

Many of us have never heard of the 529 Plan, but it can be a great way to help with your child’s college fund. It is a state operated savings fund, which offers tax incentives. Every state has some kind of 529 Plan; we will look at 2 common types.

• Savings Plans: These are most similar to a 401K or IRA. You invest money into mutual funds and/or investments. Your state’s plan will outline several choices for you to choose to invest in and depending on what you choose, your savings plan will fluctuate based on the performance of the option you chose.
• Prepaid Plans: These are a great option if your child is a bit older and knows that he wants to attend an in-state college, because with this plan you will start to pre-pay all or some of the cost for your child’s education. Some of the funds can be transferred to an out-of-state college; please refer to your state’s laws on this.

529 Plan Advantages

There are many advantages to the 529 Plan, starting with State and Federal Tax Benefits. Federally your 529 investment will come out tax free. Each state has different rules for their 529 Plan, but it is worth the time to figure out what your state offers. Also, the plan offers you the freedom of changing which investment option you choose, usually once every 12 months, so you are not tied into any one investment. After you have chosen your first investment option and made a contribution to the fund, you can set up automatic deposits, allowing you to continue to grow your investment, without having to sit and worry about when and how much you will put in next.

Financial Aid and 529

When being considered for financial aid, as of the 2009-2010 college school year, the 529 Plan will be taken into account, along with the parental assets, at a maximum of 5.64% rate when figuring the student’s Expected Family Contribution. This is another reason why the 529 Plan is a great option; it has minimal effect of the student being able to get financial aid.

Last Thoughts

Do yourself a favor and look into your state’s 529 Plan and start your child’s college fund today.

Benefiting from federal tax incentives while obtaining a college education is a win-win situation. While many are unaware of how to go about this, wealth-education information is everywhere and should be carefully studied. With diligent research and a commitment to learning as much as possible, parents and students are often surprised to discover that tax breaks and college savings often go hand in hand.

The following are but a few of the programs, which offer tax incentives and other savings while helping families afford the cost of college without having to obtain personal loans:

US savings bonds

If purchased by someone 24 years old or older after 1989, redeeming EE and I savings bonds may be done so without paying taxes on them if the owners of the bonds, their children or a spouse are using the money to help pay for college. However, income limits apply to such savings. For instance, in 2010, those who earn between $70,000 per year and $85,000 per year are excluded. For married couples who file a joint tax return, this income limit is between the amounts of approximately $105,100 per year and $135,000 per year. It should further be noted that these income limits are subject to increase with each year. Consulting with a qualified investment advisor can help a person determine if and how these limits may affect them.

Hope Scholarship Credit

Also known as the American Opportunity Tax Credit, the Hope Scholarship Credit allows a parent to claim a one-hundred percent credit up to $2,500 annually per child for as many as four years per student. This credit is only allowed if a student is enrolled at least half-time in a degree program and the student must be in their first four years of undergraduate study in order to qualify. Income guidelines do apply, therefore it is recommended that a professional be consulted before applying for a Hope Scholarship Credit.

Coverdell Education Savings Account

This college savings program was once known as an Education IRA. Now, commonly referred to by the acronym, ESA, earnings on these education savings accounts be tax-free if they are used for college costs. Up to $2,000 can be contributed to this account per child and these accounts can actually be used to fund a student’s precollege education, such as private school tuition for elementary and secondary schooling.

Individual Retirement Accounts (IRAs)

When money is withdrawn early from a traditional or a Roth IRA for the purpose of paying for college, penalties for doing so are waived. This is true whether the student is the investor, the investor’s spouse, a child or the investor’s grandchild. While taxes are still likely to be due on such a withdrawal, the penalties normally assessed on such are not, which can amount to a significant savings to help pay for college.

Consider all the options

Being aware of tax incentives that will help offset the cost of college makes affording an education easier than ever. By asking a qualified tax professional and investigating all available options, families find great reward in the savings they discover. While a college education can be expensive and some find themselves taking out personal loans in order to pay tuition, other options are available and each should be considered carefully.

Home can be sweet whether you rent or buy

For people who’ve never owned a home, the relative cost-effectiveness of buying and renting is a frequent concern. Understanding the benefits and the risks of both options can help people make the right decisions. There was a time when buying was almost always considered to be the better choice, but today this is not always so.

Before you decide whether to buy or rent

Once upon a time, homeowners enjoyed mortgage payments that were equal to or, in many cases, less than rental payments on comparable houses. Times have changed, however, and so have rent and mortgage prices. Today, because so many factors are involved there’s little consistency to be had in answering the question of whether it’s best to rent or buy. To take just one example, in the past, people tended to live in the same home for thirty years or more. This made home ownership a wise choice for many.

Lifestyle choices

For people who work in fields may require them to relocate in the next three to five years, or for people who have goals of moving to an area where homes are more expensive, buying now may not be the best option. However, for those who plan to live for the next several years in an area where they can currently afford to buy, then buying may be the better choice. Naturally, in any given situation, the decision depends on many factors other than current market prices and job stability, but considering a purchase under these circumstances makes good sense.

Home maintenance

Prospective home buyers should also consider ownership costs beyond a mortgage, home insurance, and real estate taxes. When those costs are factored in, the cost of owning a home can far exceed the cost of renting one. Maintenance costs may include:

• Repairs
• Gardening and landscaping
• Homeowner association fees (when applicable)
• Routine maintenance (painting, cosmetic updating, etc.)
• Major repairs and remodeling

For those who wish to avoid these additional costs or who determine that they cannot afford these costs on top of monthly mortgage payments, insurance, and taxes, home ownership may not be the choice.

Tax considerations

Home ownership is often provides special tax breaks. For instance, homeowners are able to deduct the interest paid on mortgages loan from their taxable incomes. When the interest paid on a mortgage is sufficient to allow a homeowner to itemize deductions, the tax savings can be significant. Before purchasing a home, it’s a good idea to calculate anticipated tax breaks resulting from payment of mortgage interest. Homeowners may also benefit from other deductions, such as property taxes.

The final analysis

In many cases, home ownership can offer financial savings and stability. However, it’s not necessarily the best choice for everyone. When considering whether to buy or rent, each person must weigh his or her own personal pros and cons in addition to the general considerations mentioned above.

In today’s economy, almost everyone is looking for fast cash and using tax deductions may be a solution. The tax laws are always changing and new deductions are brought to the market. Unfortunately, not everyone is aware of them. Here is a list of the deductions that are most overlooked by taxpayers.

A home sale

Owning a home gives taxpayers a benefit of hefty write-offs. They run from property taxes to mortgage interest deductions. For homeowners who sold their home, there are also benefits. They can deduct the amount of property taxes they paid while still in the home and the commission paid to an agent during the sale. Any other fees incurred at the closing can also be deducted from a tax liability.

Taxes on a car purchase

Anyone who bought a car in 2009 paid sales tax on the purchase. Some states tax car buyers every year. For example, Kentucky believes the continued taxation is a tax for “the privilege of using a motor vehicle upon the public highways.” If a consumer lives in a state that adheres to this taxation, he or she can deduct a percentage of the tax as part of a “personal property tax.”

Charity items and deductions

Donations are another tax deduction that can substantially reduce a consumer’s tax liability. Cash, household items and clothes all can add up for the deduction. Consumers also can add appraisal fees and any other fees associated with the donation. If the item is valued greater than $500, they are required to provide an appraisal along with tax documents. Anything such as a big-ticket appliance, furniture, electronics or vehicles need to be professionally appraised to assure the value is accurate prior to filing.

Deductions for time donated to charitable organizations

For people who donate time and other efforts to charity, they also can use additional deductions. Consumers who volunteer in a local community driving a bus or car for charity can deduct transportation or mileage logs for the vehicle. They can also deduct receipts for tolls and parking. Fast cash can be found for those who donate time if they keep clear records of any payments made. The IRS requires documentation, but it can be a considerable deduction.

Cleaning bills can be deducted

Most travelers deduct airline costs and hotel for business, but not everyone knows they can deduct cleaning bills, too. Consumers should keep all receipts from Laundromats and cleaners. This is a business deduction and taxpayers can use it when the total pushes them over the 2% limit for miscellaneous deductions.

Shipping deductions

Any shipments made for work purposes can be deducted. That includes documents, baggage and displays too large to travel with consumers. These will be part of the miscellaneous deductions. Some airlines even increase the cost of travel by charging to check baggage, and this too can be added to the deduction. Consumers need to keep all receipts and have records to prove the charges were made.

Finding lesser-used deductions

Using the lesser-known deductions is a great way to find fast cash that can reduce a tax liability. The key is to keep all documentation for each deduction and be ready to produce them if requested. The above deductions also fall under the heading of miscellaneous deductions and all are “below the line.” That means that consumers can take the deductions after they have calculated their AGI, adjusted gross income. Then they have to itemize the deductions on a Schedule A. The sum of the total miscellaneous deductions has to be more than 2% of the AGI. For example, if an AGI is $80,000, all miscellaneous deductions must be more than $1,600. Though there are some regulations and rules to follow, they can be helpful if managed correctly to minimize tax liabilities.

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It may take a small loan to fund child care these days, but there are ways to manage. The Child and Dependent Care tax credit is a new credit the government has initiated to help consumers cut their tax liabilities. There are some eligibility requirements, but overall it is another good way to eek down a high tax bill. Here are some of the basics of the Child and Dependent Care tax law.

How much does the credit pay?

The tax credit does not pay for all of your child care costs—that isn’t its goal. Rather, it is set up to aid parents in their difficulties. The IRS limits the amount parents can claim and once you reach that, you only get a percentage of that cost back. A parent can claim up to $3,000 for one dependent or up to $6,000 for two or more dependents. As long as parents keep records of spending on child care, they should be able to combine tax cuts and benefit nicely.

The limits on the tax cut

Next there are limits to address regarding the tax cut. Once you figure out how much you pay in child care costs, you get to take off a percentage of it to figure out your actual tax credit. That means that the maximum credit is $1,050, or 35% of the $3,000 limit. The 35% rate, however, is for low-income taxpayers. If your salary is higher, you could be eligible for only 20%.

When it comes to your dependents, the formal definition of “child” as per the IRS must be adhered to. The child must be under 13, related to you and live with you the majority of the time. Divorced parents have different clauses, but in general these are the requirements. The Child and Dependent Care credit also covers dependents who are incapacitated for some reason, either physically or mentally. There needs to be the proper documentation, but if you are providing care for any child or dependent, you should take advantage of this tax law.

Other requirements

There also is a job requirement. To claim the tax break you have to be employed and if you are married, both partners have to be employed. There are other tax filing requirements and a tax consultant should be utilized to remain in compliance with the law. Jamie Breuer, small loan and tax consultant, said, “Many people don’t know the vast amount of tax breaks out there. In particular now after the recession there is a whole new family of laws that everyone should be taking advantage of.”

In addition to dependents, tax filers also need to cite their child’s caregiver and be able to provide employer identification numbers if applicable. Things like daycare providers and summer camp providers should not be ignored. In addition, private home nurses, licensed caretakers, nursery school costs, and household help can all be included in the tax preparation process and cut down on tax liabilities. The costs of care for children and dependents is not set to decline any time soon, so parents need to have tools to bring down their tax liabilities. Though in the past they had to use small loan products, savings and outside help, today the government is offering some much-needed assistance.

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