South Orange County Blog from Bob Phillips

GIFTS, WE ALL LIKE TO RECEIVE GIFTS

A longtime friend of mine, Duane Gomer, is a local expert/provider of real estate education.

Below is a recent post of his.

Tax-Saving-Tips-252“There is a lot of misunderstanding about giving someone gifts and the tax consequences. It is not a simple matter and before gifting large sums (not just cash but anything of value) get professional advice. You will be glad you did. Sleeping   at night becomes more difficult during an IRS Tax Audit.

Most people know that you can gift up to a certain amount to someone with no tax problems. Currently, the amount is $14,000 per year and your spouse could also contribute $14,000 per year so in our case with four children we could gift each one $28,000 or a total of $112,000, and we could throw in five grandchildren for another $140,000. That is  $252,000 per year, and you can give the same $14,000 to relatives, parents, friends, etc. with no tax. Wouldn’t take too long to give away  all we have.

You can add even more by making direct tuition payments for students or direct payments of a person’s medical expense. You can even use a 529 plan to give more. Do not do any of these gifting ideas without professional advice to make sure your tracking meets IRS rules.

What if we want to give one child the $252,000? We can do whatever we want, it is our money, but is there any tax to pay that year if this is the first gift that we have ever given. No, No, No. This year the estate tax exemption is $5.43M. You can gift up to that amount in any year without tax to pay, BUT any amount over $14,000 for that year must be reported, and the amount is deducted from the $5.43M for later.

With everyone living to advanced ages, heirs are getting their money late in life and in large amounts. Some money spread to them through the years would be more valuable, and the estate tax impact would not be severe. To give is better than to receive. I am not positive of that, but you should consider this topic before too long. Time is fleeting.” ( End of Duane’s post. Thanks, Duane!)

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Four Excellent Reasons to Buy a Home So You Can Get out of the “Renting Rut”

Three Excellent Reasons to Buy a Home So You Can Get out of the Renting a home is a good option for some, but buying a home just might be the best thing for you.

There are some big advantages to buying a house that will help you get out of your renting rut and focus more on your future.

#1.)  Build Equity

Did you know that when you rent a home, you help someone else build equity? Any changes that you make with your landlord’s approval puts money back in his or her pocket. Keeping the yard clean and taking care of routine maintenance builds equity in that property. When you buy a home of your own, you have the chance to build equity of your own, which can add significantly to your net worth.

#2.)  Save On Your Taxes

When you rent a house, you cannot deduct the money you spend on your taxes. Though some states will let you make a small deduction based on the total amount you spend in rent each month, you cannot make any deductions on your federal taxes. When you buy a home, you can save with a few different types of deductions.

The federal government lets you make a deduction if your home is worth more than what you currently owe on your taxes. If you purchased your first home, you can make a deduction in regards to your property taxes. You can also deduct money that you spend on some renovations and energy saving appliances.

#3.)  Put Your Personal Touch On Things

As long as you continue renting, you live in a home that belongs to someone else. Your landlord has final say over what you do and do not do. This often means that you cannot make repairs or significant changes without seeking approval first.

Renting a home lets you put your personal touch on things. You can paint the walls any colors you want, rip out the carpet to add hardwood flooring or even make significant changes outside to turn your new home into your dream home.

#4.)  Interest Rates Are STILL Incredibly LOW!

One factor that has contributed to home affordability has been the incredibly low interest rates that have been available for the last couple of years.

Now that you know more about the benefits of buying a home and how that purchase can get you out of the rental rut you’re in currently, isn’t it a good time to give me a call? I would be thrilled to assist you in becoming a homeowner. Let’s go home shopping!

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5 Worst and Best Ways to Use a Tax Refund

Posted in Budgeting, Household Finances, Personal Finance, Tax Tips, Taxes by southorangecounty on April 12, 2014

By Nancy Zambell, an InvestorPlace Contributor, April 6, 2012

My parents were working people, with five children (deductions!), which meant they received a nice little check each year after filing their taxes. They didn’t have the benefit of a good tax adviser and didn’t understand that it was their money that Uncle Sam was returning to them, year-after-year. In fact, they were giving the U.S. government  a tax-free loan!

tax-refund

Imagine what that $1,000 or so they received, annually, could have turned into had they been putting it away, instead of being so generous to Uncle Sam.

But that was then, and my folks weren’t any different than most people on our block. But in today’s world, with so much good (and often no-cost) advice, there’s almost no excuse for letting Uncle Sam have free use of your money. All it  takes is a little calculation to determine how much less you should be paying in throughout the year so that you just about break even by Dec. 31.

For many people, it’s this simple: Let’s say you’re getting about $1,000 back every year from your tax refund. Divide that by 12, and you get $83.33 — the amount you should reduce your paid-in taxes by each month. Just call your payroll department, and they’ll give you the right form to do that. Wouldn’t it be better to have that $83.33 in your pocket, instead of lending it to the government each month?

That’s a great strategy for 2012. But if you’re expecting a refund from your 2011 taxes, let’s look at the worst and best ways to spend that windfall:

 The 5 Worst Things to Do With Your Tax Refund

  1. Put it in your checking account, and spend it on a lot of little things. If you do that, you won’t have any idea where your money went.
  2. Go to Las Vegas or buy a lot of lottery tickets, to “leverage” your refund into bigger winnings. Bad idea. Need I say more?
  3. Use it for a down payment for something you should pay cash for (like a vacation, furniture, or swimming pool), and then taking on a financial obligation that you don’t need (exceptions: houses or cars).
  4. Lend it to a relative or friend. Consider those loans as gifts, because, chances are you won’t get your money back.
  5. Spend it all on a luxury vacation (unless you normally take luxury vacations and don’t have any other financial obligations).

Instead of wasting your refund, consider putting it to good use in the following ways:

The 5 Best Things to do with your Tax Refund

  1. Fund a six-month emergency stash. The challenging economy of the last few years took its toll on many folks, but those with an rainy-day fund fared much better than those who were already living paycheck-to-paycheck.
  2. Fund an IRA. If you don’t already have one, this would be a great start. If you’re under age 50, most folks can contribute up to $5,000 this year; over age 50, the “catch-up” contribution rises to $6,000. No matter your age, if you’re still working, saving for retirement is the one of the very best things you can do with any “windfall.”
  3. Start your own business. According to the Kauffman Foundation, more than 543,000 new businesses were created in 2011. If you’ve always wanted to have your own company, the improving economic period we’re in right now is the prime time to begin. If you can’t afford to do it full-time, start out slow.
  4. Invest. If you’re a beginner, start with an exchange-traded fund or a mutual fund. If you currently invest, put more money to work in your existing holdings or supplement your portfolio with some new additions.
  5. Start a 529 (college-investment plan) for your children or young relatives. I did this with my nieces and nephew when they were born, and so far, two out of the three have used the money to help fund their college years.

These are hardly the only great ideas for getting the most from your tax refund, but they’re my favorites. Bottom line — don’t waste the money. And for 2014, change your deductions so that you can turn that extra money in your paycheck into a greater stockpile each and every year — a seed that can grow into a worry-free retirement.

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7 Financial Benefits of Home Ownership This Tax Season

An article by Michael Corbett, from Trulia.

tax-time-3The financial benefits of homeownership are evident year round, but particularly around tax time – they seem to jump off the page. Let’s examine how homeownership makes “cents” –  from the tax benefits, to good old fashioned financial stability.

1. Homeownership Builds Wealth Over Time

We were always taught growing up that owning a home is a financially savvy move. Our parents knew it, and their parents knew it. But this past decade of real estate turbulence has shaken everyone’s confidence in homeownership. That is why it’s so important that we discuss this again now that we’re in a ‘new market.’ Homeownership can be a very savvy financial  move – but only if people buy homes they can actually afford. In 2014, this idea of sticking to a home you can afford to gradually build wealth is a “rule” that just happens to be new and old at the same time.

2. You Build Equity Every Month

Your equity in your home is the amount of money you can sell it for minus what you still owe on it. Every month you make a mortgage payment, and every month a portion of what you pay reduces the amount you owe.  That reduction of your mortgage every month increases your equity. That is especially true now with the elimination of risky mortgages like negative amortized and interest-only loans – thanks to the new “Qualified Mortgage” rules. The way mortgages work is that the principal portion of your payment increases slightly every month year after year. It’s lowest on your first payment and highest on your last payment. Thus, as the months and years go by, your equity grows!

3. You Reap Mortgage Tax Deduction Benefits

  • Mortgage deduction: The tax code allows homeowners to deduct the mortgage interest from their tax obligations. For many people this is a huge deduction, since interest payments can be the largest component of your mortgage payment in the early years of owning a home.
  • Some closing cost deductions: The first year you buy your home, you are able to claim the points (also called origination fees) on your loan, no matter whether they are paid by you or the seller. And because origination fees of 1 percent or more are common, the savings are considerable.
  • Property tax is deductible: Real estate property taxes paid on your primary residence and a vacation home are fully deductible for income tax purposes.

4. Tax Deductions on Home Equity Lines

In addition to your mortgage interest, you can deduct the interest you pay on a home equity loan (or line of credit). This allows you to shift your credit card debts to your home equity loan, pay a lower interest rate than the horrendously exorbitant credit card interest rates, and get a deduction on the interest as well.

5. You Get a Capital Gains Exclusion

If you buy a home to live in as your primary residence for more than two years then you will qualify. When you sell, you can keep profits up to $250,000 if you are single, or $500,000 if you are married, and not owe any capital gains taxes. Now, it may sound ridiculous that your house could be worth more than when you purchased it after these past several years of falling house prices. However, if you purchased your home anytime prior to 2003, chances are it has appreciated in value and this tax benefit will come in very handy.

6. A Mortgage Is Like a Forced Savings Plan

Paying that mortgage every month and reducing the amount of your principal is like a forced savings plan. Each month you are building up more valuable equity in your home. In a sense, you are being forced to save—and that’s a good thing.

7. Long Term, Buying Is Cheaper than Renting

In the first few years, it may be cheaper to rent. But over time, as the interest portion of your mortgage payment decreases, the interest that you pay will eventually be lower than the rent you would have been paying. But more importantly, you are not throwing away all that money on rent. You gotta live someplace, so instead of paying off your landlord’s home or building, pay off your own!

As always, you must look very hard at your personal situation before making the big decision to buy.

 

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Get The Overview On Escrow Accounts

Get The Overview On Escrow AccountsWhether you are purchasing a new home or you are considering applying to refinance your home, in many circumstances, the lender will require an escrow account. These accounts are often a source of confusion for homeowners.

In reality, these accounts benefit the homeowner and help protect the lender.

What Is An Escrow Account?

Escrow accounts are sometimes called “impound” accounts. These accounts are set up to help manage payments of property taxes and homeowner’s insurance.

Depending on the individual requirements of the lender, you may be asked to pay as much as one-quarter of these upfront and they will be put into the account for the purposes of making payments.

Who Controls Escrow Accounts?

Lenders have complete control over escrow accounts. However, homeowners are entitled to receive an annual statement advising them of their escrow balance.

If there is an increase or decrease in insurance payments through the year, a homeowner may request the lender evaluate the escrow account and change the amount that is paid.

Is Interest Paid On Escrow Accounts?

There is no mandate to pay interest on escrow accounts. When you refinance your home, the funds for your taxes and insurance are calculated into your overall payment.

The portion that is to be used to pay taxes and insurance is placed in escrow. Arizona laws do not require lenders to pay interest on these accounts.

What Happens If I Sell My Home Or Refinance?

When you sell or refinance your home, your escrow account will be credited at closing. The amount may be used to lower your out-of-pocket costs or may be turned over to you as a direct payment.

What Happens If There Is Not Enough/Too Much Money In Escrow?

If your lender has underestimated your escrow payments, they may request you send an additional payment to make up the difference. In the event you are paying too much into escrow, your lender has the discretion to release the overage amount directly to you.

In most cases, shortfalls or overages of $50 or less are typically not a major concern.

If your lender requires you to have an escrow account for the taxes and insurance portion of your mortgage payment, it can be very helpful. Escrow accounts help ensure you do not have to come up with a large payment once a year for insurance or quarterly for taxes.

In some cases, if a lender does not require an escrow account, as a borrower, you may request they escrow your taxes and insurance for convenience.

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Mortgage Debt Forgiveness Act Extended for 1 Year!

Mortgage Debt Forgiveness Act Extended for 1 Year!

JANUARY 1ST, 2013 BY  of Broadview Mortgage 
TOPICS: HOME MORTGAGE NEWS

Mortgage Debt Forgiveness Act Extended

January 1st, 2013:  Senate overwhelmingly passed H.R. 8 with the House approving it less than 24 hours later by a much lower margin. H.R. 8, dubbed the Job Protection and Recession Prevention Act of 2012 addresses many tax deductions that were due to expire today (January 1st, 2013.) but it’s now on it’s way to the President’s desk to be signed.

Nestled deep in the bill is Section 202: Extension of Exclusion from Gross Income of Discharge of Qualified Principal Residence Indebtedness.

Here is Section 202 (page 25 of this PDF) in it’s entirety:

SEC. 202. EXTENSION OF EXCLUSION FROM GROSS INCOME OF DISCHARGE OF QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS.

  • (a) IN GENERAL.—Subparagraph (E) of section 108 (1) is amended by striking ‘‘January 1, 2013’’ and inserting ‘‘January 1, 2014’’.
  • (b) EFFECTIVE DATE.—The amendment made by this section shall apply to indebtedness discharged after December 31, 2012.

Why is the Extension of Mortgage Debt so Important?

If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances.

When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender.

The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.  The Form 1099-C, once reported to the IRS becomes taxable income for the tax year in which it was reported.

Not only can this mean a potentially huge increase in the personal taxes you owe, completely wiping out any refund you were counting on, it can also kick you into a higher tax bracket!

Last Chance to Short Sale

I am still a huge fan of Short Sale or Deed in Lieu of foreclosure as alternatives to foreclosure.  Not only can you re-enter the real estate market and buy another home sooner, it’s karmically a better choice as you are proactively approaching the lender and warning them that default on your mortgage is inevitable.

Conventional financing considers this a “positive step” on your part and will allow you to buy anywhere from 4 to 5 years sooner than if you were to allow the home to go into foreclosure and let the bank take back the home.

I would love to think that FHA would also consider short sale or deed in lieu of foreclosure as a more responsible alternative to defaulting on your mortgage and loosen their guidelines for buying as well.

Don’t Expect Another Extension

Don’t look this gift horse in the mouth!  If default on the mortgage for your primary residence looks to be an inevitability, reach out to a Real Estate agent that specializes in short sales and start exploring your options.

If you don’t know of a Real Estate agent that can help, I am happy to refer you to one of the many highly experienced agents I have met and worked with throughout the years.

Let’s cross our fingers and hope that by the time you’re reading this that it’s a done deal!” ( End of Scott’s article.)

Scott Schang is one of my favorite lenders, based in Orange County, California. Thanks for your insights, Scott.

By the way, I am one of the local agents who specializes in assisting homeowners in their decision whether to short sale their property.  I am well experienced, and certified with both the CDPE and the SFR distressed property assistance designations.

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Understanding the Fiscal Cliff (In 2 Minutes 30 Seconds)

Posted in Household budgeting, Household Finances, Jobs, Personal Finance, Taxes, The Economy by southorangecounty on December 3, 2012
                                                      
                                                     Click on the graphic above, for the video version.
Democrats, here are eight principles to guide you in the coming showdown over the fiscal cliff:

ONE: HOLD YOUR GROUND. The wealthy have to pay their fair share of taxes. That’s what the election was all about, and we won. It’s only fair they pay more. They’re taking home record share of national income and wealth, and have lowest effective tax rate in living memory.

TWO: NO DEAL IS BETTER THAN A BAD DEAL. You’re in a strong bargaining position. If you do nothing, the Bush tax cuts automatically expire in January, and we go back to rates during Clinton administration. Which isn’t such a bad thing. As I recall we had a pretty good economy during the Clinton years.

THREE: MAKE REPUBLICANS VOTE ON EXTENDING THE TAX CUTS JUST FOR THE MIDDLE CLASS. After all the Bush tax cuts expire, have Republicans vote on an extending the Bush tax cut just for the middle-class. If they refuse and try to hold those tax cuts hostage to tax cuts for the wealthy, it will show whose side they’re on. They’ll pay the price in 2014.

FOUR: DEMAND HIGHER TAX RATES ON WEALTHY, NOT JUST LIMITS ON DEDUCTIONS. Don’t fall for Republican offers to limit some tax deductions on the wealthy. Demand we go back to higher tax rates on the wealthy and eliminate their unfair tax loopholes, so they truly start paying their fair share.

FIVE: DON’T CUT SAFETY NETS. Don’t sacrifice Medicare or Social Security, or programs for the poor. Americans depend on these safety nets and can’t afford any benefit cuts.

SIX: DON’T CUT INVESTMENTS IN OUR FUTURE PRODUCTIVITY. Education, basic R&D, and infrastructure aren’t spending; they’re investments in our future prosperity. If the return on these investments is greater than the cost, they ought to be made, period.

SEVEN: CUT SPENDING ON MILITARY AND CORPORATE WELFARE. You want to cut, cut spending on the military — which now exceeds the military spending of the next 13 largest military spenders in the world combined. And cut corporate welfare — support to agribusiness, oil and gas, Big Pharma, big insurance and Wall Street.

EIGHT: PUT JOBS BEFORE DEFICIT REDUCTION. Finally, Don’t cut the budget deficit as long as unemployment remains high. Otherwise you’ll cause the economy to contract, making the deficit even larger in proportion. That’s the austerity trap Europe has fallen into. We need to create American prosperity, not European austerity.

Remember: Jobs come first.

ROBERT B. REICH, Chancellor’s Professor of Public Policy at the University of California at Berkeley, was Secretary of Labor in the Clinton administration. Time Magazine named him one of the ten most effective cabinet secretaries of the last century. He has written thirteen books, including the best sellers “Aftershock” and “The Work of Nations.” His latest is an e-book, “Beyond Outrage,” now available in paperback. He is also a founding editor of the American Prospect magazine and chairman of Common Cause.

Follow Robert Reich on Twitter: www.twitter.com/RBReich

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