Archive for October, 2006

Monthly Archive

Mon 23 Oct 2006

Dealing with Multiple Debts

Posted by lizweston under Budgeting, Q&A with Liz, Student Loans, The Basics
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Dear Liz: I just graduated from college and landed a job that pays $43,000 a year. Three years ago, I purchased two houses as rentals. To tell you the truth, my mortgage debt is high, but I have only $5,000 in student loans and about $3,000 in credit card debt. The mortgages have fixed-interest rates that are low.

Should I focus on paying down the mortgages or is it a big mistake to do that and lose the tax deduction? What do I do if the housing market crashes? Have I taken too much risk?

Answer: What’s important is not how much debt you have. It’s what kind of debt and how well you’re managing it.

Credit card debt, for example, is almost always a bad idea. The interest typically isn’t deductible and can be jacked up if you make a single misstep (such as paying late or maxing out your cards).

Many people erroneously believe that credit card debt is normal in America, but in fact Federal Reserve figures show the majority of U.S. households have no credit card debt, and the median balance among those that do is just $2,200.

Student loans and mortgages, meanwhile, are usually classified as good debt because the things they buy (education and homes) are considered investments.

As long as you haven’t overdosed on such debt � by buying too much house or borrowing more for your education than you’ll make in your first year out of school � you don’t need to be in any particular hurry to pay down this debt.

In fact, most people find there are much smarter uses for their money than paying down low-interest, tax-deductible debt such as mortgages and student loans.

You, for example, should be contributing at least 10% and preferably 15% of your gross pay to a 401(k) or other retirement account. You probably should have a fat emergency fund as well to cover those inevitable months when you’re between tenants and your homes sit empty.

Now, all this assumes that your rental houses are paying for themselves � in other words, that the rents you receive cover your mortgages and other out-of-pocket costs. If that’s not the case, then your homes may not be building wealth: They could be eroding it.

Some people bought money-losing rental houses assuming that double-digit appreciation would bail them out, but those days are over for a while. If these homes are money pits, you may be wise to sell them while you can.

Credit card tax burden can be on employer

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Mon 23 Oct 2006

Clarification on Corporate Credit Cards

Posted by lizweston under Credit Cards, Q&A with Liz, Taxes
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Dear Liz: You recently advised an entertainment industry executive about some of the pitfalls of using a credit card provided by his company.

I’m the tax director for a Midwestern company, and I believe that you overlooked a crucial statement in the questioner’s inquiry. He said the company would be paying the bill directly, eliminating the need for him to submit reimbursement requests.

If that’s the case, then the employer’s payments to the credit card company would be considered taxable income to the executive, subject to all withholding and payroll taxes.

He is then responsible for deducting his business expenses on his personal return, probably subject to the 2% limitation on itemized deductions. This is a terrible plan for more than the reasons you identified.

Answer: You just panicked a whole bunch of Hollywood executives unnecessarily.

Although these arrangements may not be common in the Midwest, they are par for the course in the entertainment industry. Fortunately for these high-living folks, direct reimbursement does not result in taxable income to the executive if the arrangement is part of an “accountable plan,” said Mark Luscombe, principal analyst for tax research firm CCH.

Luscombe cited two private-letter Internal Revenue Service rulings (200304002, Aug. 6, 2002; and 200235006, May 17, 2002, if you’re interested) in which the IRS laid out the rules for what constitutes an accountableplan.

“In reviewing these rulings, it appears that the card is to be used only for business purposes, cash advances on the card should not be allowed in most cases and the credit card bill provides adequate information for the employer to determine the business purpose of the charge,” Luscombe said.

If the bill isn’t adequate, the employer must require the employee to provide “any additional documentation necessary to support an expense where its validity cannot be established from the credit card bill,” Luscombe said.

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Mon 23 Oct 2006

Dealing with Multiple Debts

Posted by lizweston under Credit & Debt, Q&A with Liz
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Dear Liz: I just graduated from college and landed a job that pays $43,000 a year. Three years ago, I purchased two houses as rentals. To tell you the truth, my mortgage debt is high, but I have only $5,000 in student loans and about $3,000 in credit card debt. The mortgages have fixed-interest rates that are low.

Should I focus on paying down the mortgages or is it a big mistake to do that and lose the tax deduction? What do I do if the housing market crashes? Have I taken too much risk?

Answer: What’s important is not how much debt you have. It’s what kind of debt and how well you’re managing it.

Credit card debt, for example, is almost always a bad idea. The interest typically isn’t deductible and can be jacked up if you make a single misstep (such as paying late or maxing out your cards).

Many people erroneously believe that credit card debt is normal in America, but in fact Federal Reserve figures show the majority of U.S. households have no credit card debt, and the median balance among those that do is just $2,200.

Student loans and mortgages, meanwhile, are usually classified as good debt because the things they buy (education and homes) are considered investments.

As long as you haven’t overdosed on such debt by buying too much house or borrowing more for your education than you’ll make in your first year out of school you don’t need to be in any particular hurry to pay down this debt.

In fact, most people find there are much smarter uses for their money than paying down low-interest, tax-deductible debt such as mortgages and student loans.

You, for example, should be contributing at least 10% and preferably 15% of your gross pay to a 401(k) or other retirement account. You probably should have a fat emergency fund as well to cover those inevitable months when you’re between tenants and your homes sit empty.

Now, all this assumes that your rental houses are paying for themselves in other words, that the rents you receive cover your mortgages and other out-of-pocket costs. If that’s not the case, then your homes may not be building wealth: They could be eroding it.

Some people bought money-losing rental houses assuming that double-digit appreciation would bail them out, but those days are over for a while. If these homes are money pits, you may be wise to sell them while you can.

Credit card tax burden can be on employer

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Mon 9 Oct 2006

Are Probate Laws Same in All States?

Posted by lizweston under Estate planning, Financial Advisors, Q&A with Liz, Real Estate
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Dear Liz: Are laws regarding probate the same in all states? Do all estates have to go through probate upon the owner’s death, or does the estate go through probate only if it is above a certain value? If the rules vary by state, how do I find out the procedures for my state?

Answer: Probate is the legal process in which a court oversees the distribution of a dead person’s property.

The basic process is the same in every state: Assets are identified, creditors and taxes are paid, fees are distributed to attorneys, appraisers, accountants and others handling the estate. Whatever remains is distributed to the heirs.

You can avoid probate in all states by taking certain actions, such as creating a living trust or holding all your assets in ways that bypass probate, such as joint tenancy.

Otherwise, the rules about which estates must go through full probate, and which can avoid it, vary considerably by state. Some states have affidavit procedures that allow small estates to bypass probate entirely, but the definition of “small” ranges from $5,000 in New Jersey to $150,000 in Wyoming.

Other states offer simplified probate procedures for certain estates. In California, for example, estates worth $100,000 or less can qualify. California also has a “community property petition” that allows property of any amount to be transferred to a surviving spouse without going through full probate.

The Nolo Press Book “Plan Your Estate,” by attorneys Denis Clifford and Cora Jordan, includes a brief summary of state probate laws. You’ll find more complete details for each state in Nolo’s “8 Ways to Avoid Probate” by Mary Randolph.

 

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