TheWealthIncreaser.com

Intelligent Finance Improvement

Early Retirement & Wealth Building

Learn how you can build wealth efficiently and retire early…

 

In 2003 the creator of TheWealthIncreaser.com came up with a strategy to help young adults and those graduating from college implement a new system for building wealth efficiently and possibly retire early if that was their goal.

 

After reading a most recent article in Kiplinger Magazine about Millennials who retire early (in their 30’s) TheWealthIncreaser.com found it quite inspiring to see young workers retire early and that inspiration brought to the surface the topic of early retirement in the current economy and how you can do so in a more efficient manner.

 

In the article they were called FIRE (Financially Independent Retire Early–a great acronym and financial success formula that TheWealthIncreaser.com did not create–however, TheWealthIncreaser.com did create FAM® that is assisting those who desire real financial success achieve more than just financial literacy) and they are a group that is growing as more individuals and families see real advantages of retiring early and living life on their terms.

 

Regardless of your age you can retire early or achieve your goals more efficiently during your lifetime by understanding “your life stages” and determining the path that you will take toward making what you desire most during your lifetime–occur!

 

You must also have an expectation of success and a real knowledge within that you truly want to pursue early retirement or reach your goals in a more efficient manner.

 

You can achieve success more effectively and efficiently by doing the following on a consistent basis:

 

1)   Have a real understanding of the X Factors…

 

Experience, expertise, exercise and excellence must be a part of your make-up if you are to achieve at your highest level.

 

Your past experiences helped shape where you are now at and you must use that experience to your advantage.  You must also determine what you are good at or what you desire to be good at and pursue toward that with zeal and expertise will follow.

 

You must ensure that you are around to enjoy your early retirement or any retirement by ensuring that you exercise regularly, eat healthier and you feed your mind with the right information that can move you forward in a manner that works with your mind.

 

Lastly, you must have a mindset of excelling in all that you do.  You then develop the habit of consistency that you need to have to achieve at your highest level throughout your lifetime.

 

2)   Have high standards throughout your lifetime…

 

You must set lofty goals whether they be financial or otherwise.  However, setting lofty goals is only the starting point!

 

You must have every intention on achieving the goals that you set and you must visualize yourself achieving what you see.

 

You want to do your absolute best toward reaching your goals and you must be fully committed and have a high level of determination to reach or exceed the standards that you set.

 

3)   Have a mindset that is geared for success…

 

You must not let worry, anxiety, fear and frustration direct your life as it will in many cases lead to you not putting in the effort that is necessary to achieve at an optimal level and reach your financial goals in an efficient manner.

 

Although uncertainty at some level resides inside all of us—you must have an outlook of your future that is clear to you and doable by you (within your mind) if you put in the effort and stick to your plan.

 

Your ability to focus on what is important along with having the success qualities that are needed for consistent success will help direct your mind on a daily basis in the direction where success lives–and you will increase your odds of achieving your goals exponentially.

 

 

Conclusion

 

Early retirement or having the option to retire early is a lofty goal and many are pursuing that path in the current economy.

 

If you are one who would like to position yourself for early retirement you can do so by gaining the required knowledge and skills that are needed to do so at the earliest time possible.

 

For those of you who would like to continue working, you can put yourself in position to have an “early retirement” as a real option by planning now and doing so with a realistic picture of what it will take to get you there.

 

You must pursue your retirement goals in a righteous manner and in a manner that is in alignment with your core values.

 

You must ask and answer the right questions at the right time in your life so that you can repair, improve, or avoid that which serves against your early retirement ambitions.

 

You can go to the following links to learn more about early retirement and retirement in general and really make the goal of early retirement happen for you and/or your family:

 

Young Investors & Personal Finance

 9 Tips for Retiring Early 

College Graduates & Wealth Building

Wealth Building Now

Mr. Money Mustache Blog

Retirement Basics

All About Retirement

Compounding & How You Can Benefit

Life Stages of Financial Planning

Understanding the Various Types of Income

Invest like Warren Buffett

 

FIRE (Financial Independence, Retire Early) is a lifestyle, also referred to as a movement, aimed at reducing expenditures and increasing investing in order to quickly gain financial independence and the possibility of retirement at an early age.

 

All the best to your early retirement and lifelong success…

 

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Retirement Cautions & Wealth Building

 

Learn what you need to know as you approach your retirement years and the taxation of your income that can prevent you from making the wrong moves…

 

Did you know that there are a number of concerns that you should have as you approach retirement age?

 

Hopefully you have managed your credit and finances effectively prior to your retirement years and you are in position now (if you are currently retired) to take advantage in ways that will better serve your retirement years.

 

Whether you are or are not retired be sure to focus in on what can help you achieve more at this time and throughout your lifetime.  By doing so you will put yourself far ahead of those who enter retirement without doing the preparation that is necessary that could guide them toward a more enjoyable retirement journey.

 

In this discussion TheWealthIncreaser.com will show you ways that you can make your retirement years more enjoyable and put you on path to making the retirement that you desire have less roadblocks for you and your loved ones.

 

First and foremost you must realize that you want to address your retirement related financial activity in a manner where you will have no surprises as it relates to your taxes as many who retire often have no clue how their tax position will impact their retirement years.

 

You must be aware of how the taxation of your IRA’s and 401k’s etcetera, social security benefits, w-2 income (if you work part-time during your retirement years), investment income, self-employed income or other pass through income and earned pension income–will all affect your tax position.

 

If you don’t withhold enough income or pay estimated taxes at the right amount with your IRA’s and 401k’s etcetera, social security benefits, w-2 income (if you work part-time during your retirement years), investment income, self-employed income or other pass through income and earned pension income when you receive those income streams you could be in for an unpleasant tax surprise if you have not planned ahead and gotten at least a cursory overview of how taxes will affect your income streams during your retirement years.

 

  • IRA’s, 401k’s and other retirement plans

IRA’s, 401k’s and other retirement plans may require that you begin taking distributions at age 70 1/2 even if you have no need for the funds.  You must plan for the tax consequences of these withdrawals at the federal and state level (if applicable) and know where you will fall based on your unique tax position.

 

  • Social Security benefits

Your social security benefits may or may not be taxable depending on your unique tax position.  However, there is the potential that your taxes could be 85% on your social security income.  You can elect to receive your social security at various times after you turn age 62 and you must determine if taking early payments or waiting is the best move for you and your family from a tax point of view based on your overall finances and future plans.

 

  • W-2 income

If you work part-time during your retirement years you may find that it will affect the taxation of your IRA’s and other retirement accounts, social security income, investment income and your pension income.

 

  • Investment Income

Your investment income will also be taxed during your retirement years and you must know the rate that you will pay during your (and your spouse if married) retirement years based on your annual income and filing status.  There are various thresholds and depending where you fall in those thresholds you could pay 0% up to 20% depending on the type of investment, your income and your filing status.

 

  • Self-employed income and/or other pass through income

If you decide to work for yourself or you receive pass through income from a partnership or S corporation there will be tax consequences and they will vary based on your income from self-employment, other pass through income and all of your other sources of income and your filing status.

 

  • Earned Pension Income

If you have worked for an employer and they had a pension plan you would receive a 1099R and you would be taxed on that pension income at the Federal level in almost all cases.  The question then becomes did you have enough withholding or did you pay enough in estimated taxes to offset the taxes that you would owe.

 

At the state level you would also be taxed but the rate varies from state to state and many states offer you the opportunity to exclude certain retirement and other income from your taxes if you meet the states requirement.  In a few states there are no state income taxes at all, and if you live in one of those states that is even better.

 

Conclusion

 

It is imperative that you look at the tax consequences of the various income that you will receive during your retirement years.  It might be helpful to get professional projections of the taxes that you may owe under various situations from your CPA or other financial professional(s) so that you can know what to expect during your retirement years.

 

Did you seriously consider the tax ramifications of receiving income from IRA’s and 401k’s etcetera, social security benefits, w-2 income (if you work part-time during your retirement years), investment income, self-employed income or other pass through income and earned pension income?

 

It is important to look at this information in isolation and in combination as you plan out your retirement year’s income streams. 

 

Did you analyze and determine that you will have the income that you need to live at the level that you desire after your retirement years after the payment of taxes from your various sources of income?

 

These—and more are the types of questions that you must answer prior to retirement so that you don’t enter your retirement years with an unrealistic expectation of how you can enjoy life.

 

You must fervently pursue your retirement goals, effectively utilize this page and site, make yourself available to learn more about retirement and taxes from other sources and make the right financial moves in a proactive manner throughout your life.

 

By doing so you will put yourself in position where you won’t have to FEAR your financial or retirement future—whether it be the tax implication or any other concern.

 

All the best as you work toward your retirement success…

 

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The New Tax Law & Wealth Building

Understanding the New Tax Law & Wealth Building

 

Learn how you can use the recent United States tax cuts and job act law changes to maximize your 2018 and future tax filings…

 

With the new tax bill out and anxiety in the air among many taxpayers the creator of TheWealthIncreaser.com had no choice but to review the new tax bill to help alleviate the fears of many and help those who desire greater success build wealth more efficiently in the coming years.

 

Even the creator of TheWealthIncreaser.com found navigating the bill of several hundred pages to be boring and cumbersome—however key aspects that could possibly benefit you and others were focused on and analyzed.

 

In the following paragraphs highlights of the bill will be analyzed and presented in a manner that could possibly help you build wealth in 2018 and beyond in a more efficient manner.

 

Even though the new tax law will reduce the taxes for millions, that does not mean that you will be included among the millions as personal taxes are unique and vary from person to person and family to family.

 

The good and bad news is that tax rates were lowered across the board but are scheduled to expire in 2025 unless congress decides to make them permanent.

 

To keep this discussion logical and concise the order of presentation will try to keep the format of the 1040 long format as the blueprint or guideline for discussion.

 

Personal Exemptions Are Now Gone

 

You can no longer claim your children or other dependents and get a personal exemption for them—or yourself and your spouse if married.

 

Those exemptions that you have become accustomed to getting have been replaced with higher standard deductions, lower tax rates, increased child tax credits, and a dependency credit for other dependents of $500.

 

Whether the new tax changes will be of more benefit to you depends on the age of your dependents, your income level, your family size, your above the line (page 1 of form 1040) and below the line deductions (page 2 of form 1040) ,  your tax withholdings and many other factors that may be unique to you and your family.

 

Standard Deductions Are Increased Substantially

 

Standard Deductions are now $12,000 for single up from $6,350, $18,000 for head of household up from $9,350 and $24,000 for  married filing jointly up from $12,700.

 

Be aware that claiming the higher federal standard deduction may not be a wise move in some cases.   It depends on a number of factors, including the amount of your itemized deductions and your state income tax filing standard deduction (if applicable)–among other factors.

 

Child Tax Credit Increases

 

The child tax credit increased from $1,000 to $2,000 so if you have a child under age 17 you would more than likely be eligible for the credit.  The income limits for phaseouts also increased as you can now earn up to $400,000 (AGI–line 37 of form 1040) and still take the credit (up from $110,000 in 2017).  In addition, $1,400 of the credit is refundable meaning even if you owe no taxes you are entitled to the refund.

 

To claim the credit your child dependent must live with you at least half a year and you must provide over half the cost of support for the child in order for you to claim the child tax credit—similar to when exemptions were claimed in past years.

 

The EIC or Earned Income Credit remains as well—meaning those with modest income and a family of 4 with kids under 17 could see a possible increase in the amount of the refund they will receive on their 2018 tax filing.

 

Those over age 17 whom you provide support such as college students, parents and others will provide you the opportunity to claim a $500 tax credit in the filing of your taxes if they meet the guidelines for dependents under the tax law.

 

The Marriage Penalty is Finally Eliminated or at Least Made Less Relevant for Most

 

Under the new law the tax bracket for married couples are almost double that of a single person in most instances.  If you have been avoiding matrimony due to the tax code or financial concerns—you can now breathe easier.

 

If you make $500,000 or more (which is a good problem to have) the marriage penalty again starts to rear its ugly head—If you make over $500,000 and plan on getting married soon—consult your tax professional before making the hitch as there may be ways that you can reduce the tax bite.

 

Alimony is also affected by the new tax law as you can no longer deduct alimony if you pay alimony and you don’t have to include alimony as income if you receive alimony (must be after December 31, 2018 otherwise old rules apply).

 

Education Deductions Remain in Place

 

Although TheWealthIncreaser.com did not initially take the news of eliminating the student loan interest deduction seriously—due in large part to the number of student loans outstanding and the hardship that the payments continue to cause for many—there were serious efforts to eliminate this helpful above the line deduction.

 

Fortunately, those in congress used their better judgment and the deduction for up to $2,500 worth of interest on student loans remain!

 

Tuition waivers and discounts by graduate students also remain tax-free.

 

The AOTC or American Opportunity Tax Credit worth up to $2,500 per undergraduate student (MAGI of $80,000 single and $160,000 married) survived the new tax bill.

 

The Lifelong Learning Credit also survived the new tax bill and it is worth up to $2,000, or 20 percent of the first $10,000 spent in a year (MAGI of $56,000 single and $112,000 married).

 

The $2,000 limit is per household with the Lifelong Learning Credit but the American Opportunity Tax Credit applies per student and could be more valuable to you if you have several kids in college.  Your overall credit would be higher, thus your tax bill would be lower or your tax refund would be higher!

 

529 college savings plans are now eligible to be used for k through 12 grades at private or parochial schools—in addition to colleges and universities.

 

Coverdell accounts remain although it appears they will be phased out and the cap remains at $2,000 annually, however you can now roll them over into a 529 plan tax free.

 

Always keep in mind the fact that many states also sweeten the pot—as you can deduct 529 contributions in many states.  And with the limits on property taxes (discussed later) that could be significant for those affected by the limitations.

 

ABLE accounts now are available for setup for a disabled beneficiary and can be legally rolled over from a 529 plan.  The benefit of doing so includes the tax-free use of funds for a variety of purposes—not just college, private or parochial school.

 

Assets up to $100,000 don’t count toward the $2,000 limit for SSI benefits.  Contribution limits are capped at $15,000 in 2018 and your rollover from the 529 plan would count toward that cap if you were to roll over a 529 plan into an ABLE account.

 

Educator expenses continue to be deductible (up to $250) by teachers who come “out of pocket” to purchase classroom material and supplies.

 

Most Retirement Plans Are Not Affected by the New Law

 

With the new tax law a change in your withhholdings may occur.  If you are in a strong financial position consider using the additional amount that you may see on your check to save more for retirement to help lower your taxable income and build wealth more efficiently.

 

IRA to a ROTH  conversions also see limits.  In the past you could undo the conversion and avoid the tax bite by re-characterizing the conversion by October 15 of the following year.   Now once you convert, it is permanent as far as the tax bite is concerned.

 

However, if you feel that a conversion is more beneficial for you and your family and you have the funds to handle the tax bite that could still be an effective strategy.  In addition, you could convert yearly a certain amount to lessen the tax sting.

 

Real Estate Takes a Hit with the New Law

 

Many residents of high cost cities where housing costs are high are crying foul over a number of provisions in the new tax.  The new law limits how much mortgage interest you can deduct.  The limit is now $750,000 (primary and vacation homes) down from 1 million.

 

Home Equity debt (home equity loan and home equity line of credit) interest is no longer deductible unless the money from the loan is used to improve your home.

 

Property tax deductions on your schedule A are capped!  The new law limits the amount that you can deduct in state income and property taxes at $10,000.

 

Like Kind Exchanges under Section 1031 of the Internal Revenue Code are now limited.  Like-kind exchanges of Real Property survived the new tax bill, however like-kind exchanges no longer apply to any other property–including personal property associated with real property.

 

Capital Gain Tax Rates are Preserved

 

Capital gain rates remain the same but the calculation formula now differs from using the tax brackets as in the past to using income thresholds.

 

If your income is less than $38,600 single or $77,200 joint you are at the 0% rate based on your income threshold.

 

If your income is between $38,600 to $425,800 single or $77,200  to $479,000 joint you are at the 15% rate based on your income threshold.

 

If you are in the ideal position of having even higher income your capital gains rate would be 20%.

 

The above capital gain tax rates apply to long-term capital gains (assets held over a year) and if you were to sell capital assets held less than one year you would pay tax at your ordinary income rate.

 

The “so called” kiddie tax that you would normally pay also has a change in the way that it is calculated.

 

Charitable Giving May Take a Hit Due to the Higher Standard Deduction Amounts

 

Charitable organizations were not pleased by the changes in the new tax law.  Even though charitable deductions are still deductible on the 1040 long form the likelihood of many using the long form has decreased due to the elimination of personal exemptions and the increase in the standard deduction.

 

Although many give generously out of the goodness of their heart, they still enjoyed the knowledge and annual application of a tax break.    That tax break that many have been accustomed to utilizing for years will be eliminated for some taxpayers due to the increased standard deduction which effectively wipes away their ability to itemize and claim their charitable giving.

 

Self-Employed & Those Who Have Pass Through Income Will See a Benefit

 

If you are self-employed or make additional income from a side job you could possibly benefit significantly from the new tax bill.  Many self-employed businesses will be allowed to deduct 20% of “qualifying” income from their taxable income.  Even so, there may be limitations depending on your business type and income thresholds.

 

Qualifying income is what the new law states that it is and can be a gray area, so consult your tax professional.

 

Entertainment expenses will no longer be deductible,  however meals will continue to be deductible (50% limit).

 

Medical Deductions Ceiling Reduced From 10% to 7.5%

 

At least for 2017 and 2018 you can deduct medical expenses on schedule A and have a 7.5% floor as opposed to 10% under the old rules.  The lower the floor the better–as it allows you to deduct more medical expenses on your schedule A.

 

The ceiling returns to 10% in 2019 so don’t get too excited.  Hopefully congress will make the 7.5% floor permanent or at least extend the deadline as baby boomers will find a real benefit as they age and get out of the employment population and experience increased medical expenses.

 

2% Miscellaneous Deduction Including Unreimbursed Employee Expenses Take a Major Hit

 

Moving expenses have been eliminated unless you  are an “active” member of the U.S. armed forces.  Tax preparation, unreimbursed employee expenses (mileage, travel, home office expenses etc.), investment advisory fees and casualty losses other than those declared as a presidential disaster area have all been eliminated.

 

Look for shockwaves to run through certain industries where they have high “unreimbursed” expenses when they file their 2018 tax return as those who work in the affected industries will in some cases experience a substantial increase in their tax bill.

 

Corporations & Pass Through Entities Receive the Majority of Windfalls with New Tax Bill

 

With a major tax rate reduction to 21%–down from 35%–many corporations will receive a significant financial windfall due to the reduction in their tax rates as well as other perks offered in the new tax law.

 

Depreciation write offs and 179 deductions could possibly be of greater benefit to you if you purchase equipment that qualifies.  However, there are no guarantee that they will continue indefinitely.

 

However, for the time being many corporations will benefit–and you too may be able to benefit as well if you are proactive and not reactive in looking at ways that you can better utilize the new provisions that are now available to corporations and pass-through entities.

 

Self-employed businesses, partnerships, S-corporations and C-corporations will all see a reduction in their tax rates and it is up to you to look at ways that you can use this new rate change to your and your family’s advantage by now getting in the game or playing the game more successfully by taking beneficial steps toward your goals at this time.

 

 W-4 Table for Exemptions No Longer Apply

 

The withholding based on exemptions are a thing of the past and new tables for withholding are in the process of being created.  It is important that you have your tax professional provide you projections based on your current withhholdings and the new rates and filing status to help plan for your 2018 tax filing in a more intelligent manner.

 

AMT & Estate Tax Remain

 

The Alternative Minimum Tax remains.  However, the exemption has been increased to $500,000 for single taxpayers and $1 million for couples.  This change is expected to result in fewer taxpayers being hit by the AMT tax.

 

The new tax law doubles the estate tax exemption to $11.2 million for single filers and $22.4 million for joint filers. This change will only affect a small percentage of the American population  as effective estate planning and the increased exemption will leave a very small percentage of taxpayers paying this tax.

 

Affordable Care Act Individual Mandate Gone

 

In 2019 the tax (individual health mandate penalty tax) that was imposed for healthcare under the Affordable Care Act (often called, “Obamacare”) will be eliminated.

 

Conclusion

 

Be sure you understand the difference between a tax credit and a tax deduction as a credit is a dollar-for-dollar reduction and a deduction is based on your tax rate or a percentage of your taxable income.

 

Even though the new tax bill appears to overwhelmingly benefit corporations and those who are well established financially–you too can benefit!   Be aware that much of the new tax bill was unfunded and will pass the cost on to others in an “irresponsible” way.

 

However, you can benefit now and in the future if you take the right steps to make the law work better for you and your family.

 

The new law provides the opportunity for those who are astute and who are willing to pause and take effective steps to use the new law to their advantage by asking and answering the right questions the ability to achieve at a higher level in the coming years.

 

How can “I” more effectively benefit from the various changes in the law during the various phases in my life?

 

How can I manage my finances at this time so that I can put myself in position to take advantage of the various changes in the law?

 

What can I do to avoid changes in the law that will negatively affect me?

 

These (and more) are the types of questions that you must ask yourself—and answer appropriately if you are one who desire to take advantage of the new changes in the tax law as opposed to having the new changes in the tax law take advantage of you!

 

It is the desire of TheWealthIncreaser.com that this discussion has at least got you started on a path to doing what you need to do to make the new tax law work better for you.

 

All the best as you pursue tax success…

 

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Financial Security & Wealth Building

Learn why planning, discipline and patience is critical for your financial success…

 

After recently returning from Las Vegas, Nevada and having a great time, the creator of TheWealthIncreaser.com thought that the topic of not gambling on your future was a timely topic.  Although investing in the financial markets are somewhat of a gamble, it is important that you plan for long-term success or any success in an appropriate manner.

 

In this discussion TheWealthIncreaser.com will discuss why planning for your future, having the required discipline–and patience are the cornerstone for you to attain financial success in your future.

 

You Must Plan for Success

 

You must plan for your future and that includes knowing where you now stand as far as your finances are concerned.  A monthly cash flow statement will put you in position to know just that.  In addition,  you must know how your credit score is calculated whether it is your  FICO score by Fair Isaac & Company or your Vantagescore by the 3 credit bureaus.

 

Your financial success also depends on you obtaining the financial knowledge and preparation that is needed on the front end–not “after” you encounter financial difficulty.  It is imperative that you obtain a financially alert mind and not just “financial literacy” at this time if you desire to achieve at your highest levels throughout your lifetime.

 

You Must Have a Disciplined Approach Toward the Success that You Desire

 

You must understand that it is your responsibility to do what needs to be done financially throughout your lifetime.

 

By consistently doing what you need to do you will achieve your goals more efficiently and you will be rewarded for your discipline in the future by having your investments grow and also be able to enjoy life on your terms along the way.  You can reach your “retirement number” and achieve other goals along the way as long as you remain focused and disciplined on a consistent basis.

 

Above All You Must Have Patience

 

It is important that you realize that many of your goals will not occur overnight as they will often take time to reach.  This is where your patience will come in as you must use the planning stage to determine the time frame on when your various goals will be reached.  Whether you have short-term, intermediate or long-term goals, you must prepare your mind mentally for the time period that it will take to reach your various goals.

 

You must not do like others who give up to soon, or lack the mental fortitude to stick it out and make their dreams come true.  By having patience and knowing inside that you will truly reach your goals if you stick to your written plan–you bring comfort, peace of mind and joy–inside of your heart and mind.

 

Conclusion

 

By planning for your future, showing discipline on a consistent basis and having the needed patience to reach your various goals you put yourself in a much better position for reaching the success that you desire or the success that you need to attain throughout your lifetime.  You are displaying a serious commitment to improve the living conditions for yourself and your family and you are showing that you are accountable for your future.

 

In short, you are approaching your future with the attitude of a winner and joy will be in your heart in an everlasting way as you will see success in all that you do.  Will there be setbacks? Absolutely!  However, by taking initiative at this time by planning for your future, showing discipline on a consistent basis and having the needed patience to reach your various goals–success lies in the horizon.

 

By doing so you are gravitating toward the goals that you see as opposed to remaining where you are, moving slowly toward your goals or worse of all–moving away from what you desire.

 

In the end (and beginning) you must realize that achieving financial security and effectively building wealth in large part depends on your current and future mindset being in the place where success lives.

 

All the best as you plan for success in a disciplined and highly effective way as you now have the ability to change your mindset (and future) in a highly beneficial way…

 

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Financial Ratios & Wealth Building

Learn how you “CAN” use financial ratios to build wealth by taking Conscious Action Now…

 

In this discussion TheWealthIncreaser.com will look at a myriad of financial ratios that can lead you closer to the success that you desire.  With 2017 coming to an end and a new year only days away, it is the desire of TheWealthIncreaser.com that this page will serve as an inspiration for you to do more in 2018.  OK, here we go–hopefully TheWealthIncreaser.com won’t bore you too much and you can use the following paragraphs to achieve more in 2018 and beyond!

 

Rule of 72 Ratio:

 

Dollar Amount Invested/ Interest Rate

1,000 / 7% = 14.3 or just over 14 years to turn $1,000 into $2,000

1,000 / 14% = 7.1 or just over 7 years to turn $1,000 into $2,000

 

Relevance:

Relevance:

Lets you know what percentage of your assets are liquid (cash, certificates of deposits, money market etc versus stocks, bonds, mutual funds, home equity etc.) so that you can plan your lifestyle accordingly.

 

Credit Ratio:

 

Credit Owed / Available Credit or Credit Balance ÷ Credit Limit = Credit Ratio, for example

 

500/40,000 = .0125 or 1.25% very low ratio–good

30,000 / 40,000 .75 or 75% very high ratio–bad

 

To further drive it home, if you had a $5,000 credit limit and held a $2,000 balance, your credit ratio would look like this for one creditor:

 

2,000 ÷ 5,000 = .4, or 40%

 

If you had a $25,000 credit limit with all of your credit cards and monthly installment payments and held a $12,000 balance, your credit ratio would look like this for all of your creditors:

 

12,000 ÷ 25,000 = .48 or 48%

 

Relevance: The lower your credit ratio the better as lenders use the credit ratio to grant you more credit or provide you credit at the best rates based in large part on how you use credit and your payment history.  See the chart below to determine your current risk level!

 

Credit Ratio                                      Risk      
< 30%                                                Low (ideal)
30-49%                                              Medium
50-75%                                              High
76% or more                                    Very High

 

The types of credit available include: Revolving Credit, Installment Loans and Open Credit. 

 

Finance Company Accounts and Mortgage Loans will fall in the above categories, however realize that some lenders categorize them separately as well.

 

Debt to Income Ratio:

 

 Total Debt / Total Income

 

Also called Front End Ratio

 

Let’s say you have $10,000 in Gross Monthly Income (your income before any taxes or other deductions are taken out – your actual paycheck will likely be much less).

 

What can you afford as far as your home purchase is concerned?

 

x / 10,000 = .28

2.800 / 10,000 = .28 which is the maximum debt you could have on the front end (excludes housing payment)

X = 2,800  max on front end

 

You may not be approved for a mortgage loan in which the PITI payment exceeds $800 per month if you maxed out your front end ratio of 28 percent.  On the flip side, if you had zero outstanding balance you could possibly qualify for a loan up to $3,600 per month!

 

On the back end your maximum debt would be $3,600 calculated as follows:

x / 10,000

3,600 / 10,000  = .36 which is the maximum debt you could have on the back end (includes housing payment)

 

If you maxed out your credit on the front end (bills totaling $2,800 per month) you would only have $800 available for housing payment (includes principal, interest, taxes and insurance or PITI).  If you had bills greater than 10 months averaging $400 per month you would qualify for a loan up to $3,200 per month.

 

What that means in purchasing power or how much home you can afford based on this ratio depends on the current interest rates, the local property tax rate, the amount of your down payment, mortgage insurance, and homeowners insurance.  In other words, how you manage your finances and your particular market are the key factors that can lead to you purchasing the home of your dream.

 

The amount that you will be approved for will vary over time and across different locations as the market interest and where you are will play a factor.  However, always realize that high debt on the front end will bring down the amount of house you can afford based on the conventional ratio breakdown of 28% on the front end and 36% on the back end.

 

To further drive it home let’s look at another example, monthly debt in excess of one year divided by gross monthly income is your debt to income ratio or front end ratio!  If you earned 3,600 per month and had credit card and car payment totaling $800 your front end ratio would look like the following:

 

800/3,600 = .22.22 or 22% on the front end for conventional–good

 

1,300 / 3,600 = .36 or 36% which only leaves $500 per month available for housing payment on the back end for conventional–probably not enough for quality housing in most markets

 

Relevance:

The front end and back end ratios provides you the ratio that you need to determine the level of debt that you are carrying in relationship to your monthly income.  You don’t want to overextend yourself with debt and make life more difficult and painful while here on earth.  You must know how to manage your credit wisely and pay your debt in a timely manner.

You also don’t want to put yourself in position where you are house and/or car rich and cash poor–your life will be a bore!  Use these very telling and powerful ratios to make life as enjoyable as possible for you and your family while you are here on planet earth.

 

Housing and Debt to Income ratio:

 

Also called the back end ratio

 

Monthly debt in excess of one year plus expected housing payment (PITI)  divided by gross monthly income, for example

 

1,200/3,600 = .33 or 33%

 

To further drive it home, the back end ratio is the total debt to income ratio, which includes your housing debt AND other debt owed for at least the next 10 months or so, by you the borrower.

 

Back End Ratios may not exceed 36% in most cases.

 

Some Qualified Mortgages (FHA) may let the Back End Ratio be as high as 43%.

 

If you the buyer have $1,000 worth of other debt and monthly income of $4,800 (car loan, student loan, credit card, etc.), how much can you afford?

1,000 / 4,800  = 21.7%–Good on the front end ratio for conventional

 

2,000 / 4,800 = 41.6%–Not good on the back end for conventional but some lenders could possibly still make it happen for you

 

As far as FHA goes, you would qualify with both the front end  ratio 31% and the back end ratio 43% because both of your ratios are lower than those percentages (21.7% and 41.6% respectively).

 

When your other debt is taken into consideration, you the buyer(s) can afford a home with a PITI payment of $1,000 using and FHA loan and you would not qualify for a conventional loan according to the financial ratio guidelines.  However, you could possibly qualify for a conventional loan even with those ratios if a conventional lender worked with you to make it happen.

 

If you are like most buyers, going up to a 36% debt to income ratio is not comfortable!

 

A 43% back end ratio is even more difficult to handle, even for the most frugal purchaser(s).

 

However, a better school district and/or being closer to your job or family members may well be worth the trade off!  It all depends on what you value and your ability and willingness to put into place a process that allows you to know your cash flow position up front so that you can better plan for your living conditions in the future.

 

Do you have an adequate emergency fund and have you planned for your future in a comprehensive way?  By answering these questions you can get on a path toward making the best decision for you and your family.

 

If you like to eat out, entertain and save abundantly for your future you might determine that a 43% ratio is too high a price to pay at this time and you might postpone your home purchase until you could get more income coming in on a monthly basis or you paid off certain debt.  Your lifestyle and plans for your future will play A LARGE PART IN DETERMINING THE BEST APPROACH TO TAKE.

 

The temptation may be great and you may want to go for a 43% back end ratio. What would that look like with our current example?

 

You still would only qualify for a loan of $1,060 (2,160/4,800) unless FHA decided to allow you to go higher or you paid off some debt or increased your monthly income.

 

NOTE: When you decide to purchase your home where you will seek a loan, remember that Lenders will pull your credit reports and ask for 2-3 months of your past bank statements.

 

If there is a sudden, large amount of money added to any of your bank accounts, or if your credit card balances or car loan are paid off just prior to applying for a loan, this sends up a red flag and some lenders will be hesitant to offer you a loan without a reasonable explanation of why you took those actions.

 

Lenders may ask for a gift letter, indicating that the money does not have to be paid back, and may request a larger down payment, such as 10% instead of 3.5% or 5%.

 

It is wise for any buyer to get their financial accounts in shape “well before” applying for a mortgage loan so that they will not be disappointed! 

 

The critical back end ratio shows your ability to take on more debt (your new housing payment).

 

Mortgage lenders generally will not lend more than what would constitute 28% of a person’s monthly gross income before adding their monthly home payment to the back end.

 

If there is other debt, mortgage lenders will generally not originate a loan that causes a borrower’s total debt to income ratio to exceed 36% (mortgage plus other debt).

 

Conventional 28% front end and 36% back end, or

 

FHA 31% front end and 43% back end

 

Certain circumstances allow lenders to go higher…

 

Sales Price to List Price Ratio:

 

Sales price of a home divided by what the property listed for, for example

 

290,000 / 310,000 = .9355  or 94%

 

Relevance:

By calculating the ratio of sales price to list price of recent sales in your target market (the area where you plan on buying your home or listing your home for sale) you can get a better feel of what you should offer as purchase price, or if you are selling—the listing price:

 

Is it 90%? 95%? 103%?

 

By knowing that ratio you put yourself in position for a more realistic purchase price offer or sales price listing.

 

Loan to Value Ratio:

 

Loan amount / purchase price or refinance value

 

For example,

 

288,000 / 360,000 = .80 or 80%

 

You may also see CLTV or combined loan to value which simply means all of your outstanding loans (2nd mortgage, home equity loan etc.) divided by purchase price or refinance value

 

Relevance:

By knowing your loan to value ratio you understand immediately how much debt you are taking on from a percentage standpoint.  When you get to a certain equity position you may also be able to eliminate PMI or MIP from your monthly housing payment so it is important to know this number.

  

Investor Ratios

 

Return on Investment with Appreciation Ratio:

 

 Cash Flow before Tax + Principal Reduction + Tax Saved + Appreciation  / Cash Invested 

6,000 + 3,000 + 3,500 + 5,000 / 85,000 =  20.59%

 

Return on Investment without Appreciation Ratio:

 

Cash Flow before Tax + Principal Reduction + Tax Saved  / Cash Invested

6,000 +3,000 + 3,500 / 85,000 =  14.7%

 

The following ratios are used to Value Real Estate & the Relative Value Depends on Your Particular Market, therefore what is acceptable in one area may not be acceptable in another area, use with caution in mind.

 

Capitalization Rate Ratio:

 

Net Operating Income (from Schedule E or elsewhere) / Purchase Cost

30,000 / 390,000 = 7.7%

 Limitation: does not take into account financing

 

Cash on Cash Ratio:

 

Cash Flow before Tax / Cash Invested

6,000 / 85,000 = 7.1%

Is the strongest Method, it does take into account income, expenses and financing

 

Price per Square Foot Ratio:

 

Cost / Number of Square Feet = price per square feet

300,000 / 3,000 = $100 per square feet

Limitation: does not take into account income, expenses and financing

 

Price per Unit Ratio:

 

Cost / Number of Units = price per unit

300,000 / 4 unit quadplex = $75,000 per unit

Limitation: does not take into account income, expenses and financing

 

Gross Multiplier Ratio:

Cost / Gross Operating Income

300,000 / 50,000 = 6%

Limitation: does not take into account  expenses and financing

 

NOTE: the above numbers are rounded for illustrative purposes

 

Relevance:

 

For those who invest in rental property it is imperative that they understand the amount of CASH FLOW that they will receive (be sure to look at schedule E of the seller(s) tax return prior to purchase), they estimate the APPRECIATION that is expected or projected, they know the amount of PRINCIPAL REDUCTION that is expected at various intervals of the loan and they know the amount of DEPRECIATION (and how to break down the various elements of depreciation for their greatest benefit).  Always remember that you cannot depreciate land on rental properties.

 

By properly analyzing the rental property that you plan on purchasing and utilizing the appropriate ratios you CAN get a better appreciation (no pun intended) of the returns that you will or potentially can achieve based off of your purchase.

 

You can then know in the future if selling your property, refinancing your property, continuing to hold your property or doing a 1031 exchange will serve your best interest.  You also want to have an awareness of the tax implications at the time of purchase or preferably before you purchase so that you will have no future surprises.

 

Will you be taxed at ordinary income or capital gain rates?  What is your basis and what will you pay taxes on after depreciation.  You must understand that depreciation recapture will occur whether you take the depreciation—or you fail to do so.  Will you plan to avoid taxes in the future or will you just jump into your real estate investing career with no real plan of action as it relates to your tax implications that you will face at the time of your purchase, yearly and when and if you sell in the future?

 

Do you know about form 3115 and how you could possibly amend your tax return to get the depreciation that you overlooked if you currently own investment property and you failed to claim the depreciation?    By claiming the depreciation that you were entitled to you in essence put cash back in your pocket in a real way!  These are just some of the more pressing questions that you must ask–and answer on the front end if you are to maximize your rental property purchase.

 

Even if you purchase and quick turn properties for short term gains, you must realize that there will be tax implications (ordinary income rates if sold in less than a year and capital gain rates if sold after a year).  Whether you quick turn for a profit or buy and hold for cash flow and appreciation you must consider the combined tax implications at the federal as well as at the state level.

 

CONCLUSION

 

It is important that you use financial ratios (where and when appropriate) so that you can maximize your returns and minimize your mistakes during your lifetime.  By utilizing the above ratios among others–you can put yourself and your family on a positive path toward building wealth.

 

Always realize that there are many other financial ratios available at the corporate as well as personal level that may also be of benefit to you and your family.  In short, you don’t want to stop with what you have learned on this page.  Continue to pursue better ways that can lead you toward success in a more timely manner and use financial ratios where appropriate to help along the way.

 

All the best to applying financial ratios in a manner that will fill up your nest…

 

By taking Conscious Action Now–this page and site will show you how…

 

You CAN achieve lasting success–if you at this time make a conscious decision to give it your best…

 

By using the ratios appropriately you CAN put procrastination to rest…

 

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SEP-IRA versus SOLO 401k

 

Learn what the best choice is for your retirement future if you are a single employee at your company or you are a small company considering whether an SEP-IRA or a SOLO 401k is your best choice

 

If you operate a small company or you are a single person owner–you may be deciding among a number of retirement plans to stash away money for your retirement years.  Trying to decide the best option can be a daunting task for those who are new at facing retirement options or have recently opened a business for the first  time.

 

In this discussion TheWealthIncreaser.com will present ways that you can make this sometimes grueling decision—less grueling and help put you on a path to enjoying your retirement  in the manner that you desire and provide you with more clarity so that anxiety will not play a role in your life as you build wealth for yourself and your family.

 

It is the desire of TheWealthIncreaser.com that you will use this page as a guide so that you can experience joy on the inside that will lead to your retirement portfolio and your conscience experiencing a smoother ride!

 

Retirement Plan Options:

 

Depending on your line of work there could be many retirement options available to you.

 

Some of the more common include IRA’s (many versions), 401k’s, 403b’s, SIMPLE IRA Plans (Savings Incentive Match Plans for Employees), SEP Plans (Simplified Employee Pension), SARSEP Plans (Salary Reduction Simplified Employee Pension), Payroll Deduction IRAs, Thrift Plans, RRB Plan (Railroad retirement Benefits Plan), Traditional Pension such as Defined Benefit Plans, Money Purchase Plans, ESOPs (Employee Stock Ownership Plans), Government Plans, 457 Plans, 409A Non-qualified Deferred Compensation Plans and other profit sharing options.

 

If you desire a more in-depth understanding of the various retirement types or you feel that a SEP-IRA or a SOLO 401k is not right for you—consider going to the following links to learn more about the retirement account that may be a better choice for you.

 

https://www.irs.gov/retirement-plans/plan-sponsor/types-of-retirement-plans-1

http://www.realty-1-strategic-advisors.com/retirement-and-personal finance

 

If you are a small operator, depending on your yearly income—you could be choosing among a number of options but in the end the choice of which “Retirement Plan Option” is best for most and possibly you as well—normally comes down to the choice between an SEP-IRA versus SOLO 401k as they both allow you to maximize your contribution limits and control your investment options better than other plans.

 

However, as a practical matter it is important that you look at and  appropriately analyze all options available to you and not just base your decision on how you feel or think or based on what others are doing.

 

You must analyze all retirement options to see where you will benefit most from a revenue, savings, tax and goal oriented perspective.  After thorough analysis (and possible professional advice) you can select a retirement vehicle that serves your future goals and allow you to maximize your savings and tax advantages on an annual basis.

 

SEP-IRA

 

A SEP-IRA allows you to make contributions that are capped at 25% of your income after a reduction for self-employment taxes.  A SEP-IRA is used by those who have a small firm and solo entrepreneurs as well.

 

SEP IRA contributions for sole proprietors, on the other hand, are limited to 20% of your net self-employment income (business income minus half of your self-employment tax), up to a maximum contribution of $54,000 for 2017.

 

SEP Contribution Limits (including grandfathered SARSEPs) controls what an employer can contribute to an employee’s SEPIRA.  The amount cannot exceed the lesser of 25% of the employee’s compensation, or $53,000 (for 2015 and 2016, $54,000 for 2017).

 

Example: Lets say you are 52 years old and earned $60,000 in income after receiving your w-2 from your Limited Liability Corporation business in 2017.

 

Your total contributions would be capped at $15,000 for 2017!  

 

If you earned $144,000 your contributions would be capped at $36,000.

 

If you earned the maximum income for the year $270,000, your contributions to the SEP-IRA would be capped at $54,000.   The reason being that you have exceeded the contribution limit.

 

Can I make catch-up contributions to my SEP-IRA?

 

Because SEP IRA’s are funded by employer contributions only, catch up contributions  usually don’t apply because you as an owner (employer) would be making the contributions.

 

Catch-up contributions apply only to employee elective deferrals.

 

However, if you are permitted to make traditional IRA contributions to your SEP-IRA account, you may be able to make catch-up IRA contributions.

 

Compensation doesn’t include amounts deferred under a Section 125 cafeteria plan.

 

Compensation is limited to $270,000 in 2017 and $265,000 in 2015 and 2016.

  

SOLO 401k

 

A SOLO 401k allows you to stash away up to $18,000 in 2016 and 2017, or $24,000 in 2016 and 2017 if age 50 or over.

 

In addition, you can also use SOLO 401k’s to make ROTH 401k deferrals of after-tax money that you can withdraw tax free during your retirement years.

 

Solo 401(k), (also known as a Self Employed 401(k) or Individual 401(k)), is a 401(k) qualified retirement plan that was designed specifically for employers with no full-time employees other than the business owner(s) and their spouse(s).

 

A one-participant 401k also goes by other names, such as solo-k, Uni-k, one participant k and possibly other names as well as they are becoming more popular.

 

Although unknown by many in the general public a one-participant 401(k) has been around for a while (early 2000’s) and is basically a plan covering a business owner with no employees or just their spouse–and have the same rules and requirements of any 401(k) plan!

 

Contribution limits in a one-participant 401(k) plan

 

In a SOLO 401(k) plan the business owner (you) are both employee and employer.

 

You must always realize that contributions can be made to the plan in both capacities and you as the owner can contribute both:

 

  • Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit of $18,000 in 2016 and 2017, or $24,000 in 2016 and 2017 if age 50 or over; plus

 

  • Employer non-elective contributions up to 25% of compensation as defined by the plan

 

For self-employed individuals:

 

Total contributions to a participant’s account, not counting catch-up contributions for those age 50 and over, cannot exceed $54,000 (for 2017; $53,000 for 2016)

 

Example: Lets say you are 52 years old and earned $60,000 in W-2 wages from your S Corporation in 2017.  You deferred $18,000 in regular elective deferrals plus $6,000 in catch-up contributions to the 401(k) plan.

 

Your business contributed 25% of your compensation to the plan, $15,000.

 

The total contributions to your plan for 2017  that would be allowed is $39,000 with your maximum contribution for the year being $60,000 “if” you earned $144,000 in 2017 ($144,000 * .25 plus $24,000).

 

This would be  the maximum that you could contribute to the plan for Tax Year 2017.

 

If you had income from other sources and you participated in another 401(k) plan–your deductions would not be allowed and you would have to take corrective action.  By reading this discussion you now know that your limits on elective deferrals are by person, not by plan–meaning once you reach the limit–that’s it!

 

In essence, you must consider “the limit” for “all elective deferrals that you makes during a year”–regardless of source to ensure that you don’t exceed the limits and have to take corrective action–that could get costly!

 

Contribution limits for self-employed individuals

 

You must make a special computation to figure the maximum amount of  non elective (25% of your earned income) and elective ($18,000 in 2016 and 2017, or $24,000 in 2016 and 2017 if age 50 or over) contributions that you can make for yourself.

 

When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both:

 

  • one-half of your self-employment tax, and

 

  • contributions for yourself.

 

Testing in a one-participant 401(k) plan

 

A business owner with no common-law employees doesn’t need to perform nondiscrimination testing for the plan, since there are no employees who could have received disparate benefits.

 

The no-testing advantage vanishes if the employer hires employees. No matter what the 401(k) plan is called by a plan provider, it must meet the rules of the Internal Revenue Code.

 

If you hire employees and they meet the plan eligibility requirements, you “must include them in the plan” and their elective deferrals will be subject to nondiscrimination testing (unless the 401(k) plan is a safe harbor plan or other plan exempt from testing).

 

A one-participant 401(k) plan is generally required to file an annual report on Form 5500-SF if it has $250,000 or more in assets at the end of the year.

 

If you are a one-participant plan with fewer assets you may be exempt from the annual filing requirement.

 

Alternatives to a one-participant SOLO 401(k) plan and SEP-IRA

 

Other possible plans for a single business owner that might work for you depending on your business revenue and future goals include:

 

SEP

IRA

ROTH IRA

 

Conclusion

 

With a SOLO 401k you could contribute up to $54,000 for 2017 with a $6,000 catch-up provision if you are over age 50 (maximum contribution $60,000).

If you desire to establish a SOLO 401k you can go to: http://www.kiplinger.com/article/retirement/T001-C001-S003-set-up-a-solo-401k-with-low-fees.html

 

If you had annual income of $250,000 with a SEP-IRA you could contribute up to $54,000 for 2017.

If you desire to establish a SEP IRA you can go to: https://www.irs.gov/retirement-plans/establishing-a-sep

 

Be sure to consider other factors as well such as your years in business, when you plan to exit, tax ramifications now–and in your future, setup fees and administration fees, your anticipated future income, company growth and other factors that may be unique to you or the business that you operate.

 

You can choose to use an SEP IRA or SOLO IRA  if you are a sole proprietor, LLC or Limited Liability Company, S Corporation and possibly other legal structures that meet the IRS guidelines.

 

As you might expect the SEP IRA was once cheaper to set up and administer, however  that has now changed as many brokerage companies offer low cost SOLO-IRA setup and administering.  In addition, you must look at more than just  setup costs and the administrative fees as those are just a small piece in the overall puzzle toward your retirement goals.

 

Always keep in mind that SEP IRA contributions for sole proprietors, on the other hand, are limited to 20% of your net self-employment income (business income minus half of your self-employment tax), up to a maximum contribution of $54,000 for 2017.

 

You may have more investment choices with a SEP IRA as opposed to a SOLO 401k.

 

With a SOLO 401k you have the 25% employer contribution amount (non-elective deferral) based on your income minus the self-employment taxes–plus the elective deferrals and catch-up provision that would allow you to save more annually than a SEP IRA generally–depending on your income.

 

With both plans you would have to pay taxes on withdrawals, however at that time you might be in a lower tax bracket.  Both plans allow you to use the power of compounding to help you reach your retirement number.

 

Early withdrawals or tapping into  the account by you will result in serious tax penalties and vary depending on your age, years of contributions and whether an exception may apply.

 

Investments and Withdrawals basically follow the same guidelines that the IRS has set for IRA’s and 401k’s in general!

 

If you know that you will come out of the gate making $150,000 the decision as to the best choice will be much clearer for you.  However, if you come out of the gates slow and steady with your income increasing steadily from a low amount such as $20,000 in year one–$40,000 in year two and a steady upward trend an IRA SEP may serve your best interests during your early years.

 

In the end “proper analysis” and not just going on what you hear or see others doing –or what you feel will work is the real key.  It is the hope of TheWealthIncreaser.com that this discussion has at least provided you a starting point toward making your retirement dreams come true.

 

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25% of compensation as defined by the plan

Homeowner Tax Breaks & Strategies

Learn how you can save on your personal taxes by using the tax codes and strategic maneuvering…

 

In the current economy it is important that you use the personal income tax laws to your best advantage.  With the tax season roughly at the mid-point and the home buying season just months away TheWealthIncreaser.com thought that Homeowner Tax Breaks & Strategies was an appropriate topic to focus on at this time.

 

In the following paragraphs you will learn what you can do to lighten your tax burden and possibly achieve your goals in a timely manner if you are now a homeowner or you anticipate becoming a homeowner in the future!

 

If you are like most—focusing on your taxes is not a pleasant experience.

 

However, by focusing on and comprehending what lies ahead in your tax future you can possibly put yourself in position to experience more pleasurable moments in your and your family’s future. 

 

Be sure to choose among the following strategies (if you see the benefit of doing so) and lighten your tax burden and achieve your future goals in a more efficient manner.

 

It is important that you find an approach to effectively manage your personal taxes in the current economy that works for you and it is important that you have some ideas—and knowledge about how you can lighten your tax burden that will move you toward your future goals in a more efficient manner.

 

Be sure to retain and utilize what you feel can help you achieve your dreams in a timely manner and run what you feel might work for you by your tax professional to see if any of the following tax strategies can benefit you and your family.

 

OK enough fluff—be sure to analyze how you can utilize the following strategies if you are now a homeowner—or you intend on being a homeowner in the future:

 

  • Mortgage Related Tax Breaks

You can deduct mortgage interest, points, PMI/MIP  (a reduction in MIP of $500 for the average homeowner was expected this year in the United States but was abruptly cancelled with the change of Administrations) and your property taxes while you are a homeowner and have a mortgage and possibly property taxes even if you are not a mortgage holder.

 

You must itemize your taxes in order to claim the deductions and by doing so you will save in taxes on your federal and state returns.  In some cases it may be to your benefit to itemize on your federal tax return even though you will get less back on your federal return by doing so.

 

The reason for doing so would be that you would get more on your state tax refund but less on your federal—but your overall total (overall tax refund of state and federal) would be more by itemizing.  Many taxpayers take the quick way out and lose financially by not doing this analysis, thereby overlooking this potential option when it could possibly be to their benefit.

 

For example, if you will get $500 back on your federal taxes using the “standard deduction” as opposed to “itemizing” and $400 back in refund on your state tax refund using the “standard deduction” —your grand total is $900.

 

If you will get only $300 back on your federal taxes using the “itemized deduction” as opposed to utilizing the “standard deduction” and $800 back in refund on your state tax refund by itemizing—your grand total is $1,100.

 

Simple math tells you that you are better off electing to itemize—$1,100 minus $900 equals $200 more dollars in your pocket!  It can be difficult to determine in many cases without actually “running the numbers” as state tax laws vary and all tax returns are unique.   However “electing to itemize” might be something that applies to your situation and their could be potential advantages (primarily more cash in your pocket) for you.

 

  • Improvements in your Home (Targeted)

By purchasing solar panels, dual-paned windows, low flow plumbing, tank-less water heaters, and other energy improvements spelled out in the tax code you can possibly deduct them on your taxes if you itemize your deductions on form 1040.

Many home improvement energy related deductions are scheduled to expire in 2020 and who knows what will happen after that time.  However, at this time you can get a tax credit (applied directly against your taxes) of varying amounts up until the 2020 tax filing season.

 

  • Tax Exclusion from the Sale of Your Personal Residence

Did you know that you can possibly exclude the sale of your personal residence from taxes if you utilized your home as your primary residence in 2 of the 5 previous years?  If you are single you can exclude up to $250,000 of the gain and if filing as married filing jointly—$500,000 of the gain from the sale.

 

Therefore, if you purchase right—get a substantial appreciation in the price of your home and you decide that the time is right to move in a few years or so after the value of your home has appreciated—you could pocket a nice tax-free gain (be sure to run your plans by your tax advisor to ensure that you qualify).

 

The creator of TheWealthIncreaser.com has utilized this approach personally and with many past clients and there is some risk that is involved.  However, if you are of the personality type that doesn’t mind moving frequently, or you plan on moving frequently for other purposes—this could be a great strategy that could work for you.

 

Be sure to purchase in a neighborhood that has an upward trend in home appreciation.  Be sure that you know the risks and you have a properly funded emergency fund in place and little or no revolving debt so that you can reduce the risks involved for you and your family.  Even so, there is no guarantee that after your home purchase—the value of your home will appreciate.  Hopefully, you get the point and you can clearly see the potential of how you could actually use this strategy to build wealth.

 

  • Cancellation of Debt

Although not a pleasant use of the tax code or even an effective strategy for most (you probably lost your home) the “cancellation of debt provision in the tax code for mortgages” does lighten the sting of losing your home some as it could be even worse.  If you are one who can use the 2007 Mortgage Debt Forgiveness Act to reduce or eliminate your tax burden—you must do so.

 

The 2007 Mortgage Debt Forgiveness Act was extended through the 2016 tax year, however future extensions are uncertain at the time of this post.   If your mortgage debt was cancelled and the 2007 Mortgage Debt Forgiveness Act applies to your debt forgiveness you could legally avoid paying tax on the debt that was forgiven.  Time limits apply for using this strategy so be sure you fall within the timeline of the act to take advantage of this strategy if you have received or anticipate receiving mortgage debt forgiveness in your future.

 

  • Homeowner Exemptions at the Local, County & State Levels

Did you know that many jurisdictions offer various “homeowner exemptions” that have the real effect of reducing or possibly eliminating your real estate taxes?

 

The exemptions vary from state to state—county to county—and in many cases city to city.  However, they are available and it is your responsibility to search them out in your area and take full advantage of them.

 

Basic Homeowner Exemptions, Age Homeowner Exemptions, Military Homeowner Exemptions and many others are available.  Again it is up to you to find and enroll in them as they are in many cases—not highly advertised.  Most have filing deadlines, so immediately after your home purchase be sure to inquire.  If you used a real estate agent in the purchase of your home, your agent should be aware of the filing procedure in your area.

 

Conclusion

 

Be sure you are aware of what you can deduct or utilize in other ways (tax strategies) at the local, county, state and federal level.  Be sure to take advantage of all homeowner exemptions that are allowed in your jurisdiction that you are entitled to.  All of the strategies or options discussed in this post require that you own your property as an owner (personal residence) and the strategies are not designed for rental or other non-owner occupied properties.

 

You must always realize that you have a unique tax filing position and what may be effective and work for someone else may not work for you!

 

For example, if your AGI (Adjusted Gross Income) is $70,000 and someone else’s AGI is $40,000 and you go out and purchase $20,000 worth of solar panels and the person with $40,000 AGI does the same—you may be in position to utilize the credit either partially or in full, while the person with $40,000 of income might not be able to utilize the credit at all.

 

This type of scenario can play out in many areas of the tax code—therefore effective planning with experienced tax professionals may be to your advantage. 

 

Your income, family size, deductions, exemptions, education expenses, number of jobs, tax with-holdings, tax payments etcetera are uniquely your own—therefore effective analysis must be performed.

 

Be sure to put into action your new found knowledge about the Homeowner Tax Breaks & Strategies that you can possibly take—or make to ensure a more prosperous and productive future for yourself and your family.

 

As you move forward be sure to make a sincere effort to give it your best at all times and it is the desire of TheWealthIncreaser.com that this page has played some small part in empowering you to look at your tax situation in a more critical manner whether you are now a homeowner or you anticipate becoming one in the future.

 

It is important that you proactively look at your tax situation (you must get out in front of your taxes) and not look back “for answers” after you have encountered a difficult situation.  If you do not take the initiative to proactively attack your tax situation or any other area of your finances–you are making life on earth much more difficult than it should be for yourself and your family.

 

Don’t be afraid to get planning advice on the front end (even if you have to pay as it can be money well spent) as most planners (or those who operate at the top of their profession) are aware of strategies that you may not be aware of.

 

It is the hope of  TheWealthIncreaser.com that this page has sparked something within you to make you look at your taxes and finances in a different way, so that you can start on a serious path to achieving your dreams—starting today!

 

All the best…

 

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Learn about more “Tax Moves” that you can make…

 

Learn more about the Tax Benefits of Homeownership… 

 

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