INCOME RELATED TAX STRATEGIES
INCOME RELATED TAX STRATEGIES
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1- REAL ESTATE:
Low interest loan(s):
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a- Do you have an old, low interest rate mortgage on your principle
residence or on a rental or business property? Ask your lender if
they would be willing to offer you a discount for an early payoff.
CAVEAT(S): Understand, that any difference between an outstanding
loan balance and the (discounted) amount paid to payoff your loan,
may be considered as ordinary income.
Also, you will lose a tax advantage in terms of deductible interest
(mortgage interest) against your reported income.
This is an area where you will have to weigh all considerations of
advantages/disadvantages to this type of transaction.
Sale of your property:
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a- Any gain made on the sale of your property will be tax free if
you re-invest the full selling price of your old home against the
price of your new home. You must buy your new home within two years
before or after the sale of the old one.
b- You can take a one time $125,OOO exclusion against the gain from
the sale of your home, if you are a taxpayer over the age of 55.
Home equity loans:
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a- You can get a home equity loan (second mortgage) against your
residence for most anything that you may want. In fact, it can be
set up like a checking account where you merely write a check for
the article that you want to buy. Not unlike a regular checking
account.
b- An equity loan will probably be given at a lower interest rate
(maybe one or two percentage points) then a personal loan because
the equity in your home is used for collateral for the loan.
c- And therein lies some of the problems, that are inherent with
this type of loan. One major problem of course, is that since you
are using the equity in you home to secure the loan, you stand the
possibility of losing your home, if you default on the second loan.
A borrower should be fully aware of the pit-falls involved, when
trying to obtain this type of loan.
Be aware of balloons for this type of loan. The repayment figures
might be figured on a twenty year repayment schedule, only to find
that in five years say, your lender may decide for full and
immediate payment, after you have only paid a small portion on the
principal.
The amount that would be considered for a loan, would be the
difference between the outstanding balance owed for your first
mortgage on your home and the appraised value.
So- it really makes sense to shop around for the best deal that you
can get for a home equity loan. Just like you would when looking
for a first mortgage on a new home.
d- There are times when this type of loan makes sense. A large
medical expense would be one reason. An addition to your present
home would be another. And a child's education expenses would be a
third good reason.
e- Home equity loan interest payments, like your normal interest
payments on a first mortgage, are fully deductible. Since all other
types of loan interest rate payments are now, non-deductible, this
type of loan makes the most sense.
Rental properties(s):
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a- If you "actively participate" in a real estate investment, such
as owning a 1O percent or more interest in the property, with no
limited partnership agreements, participate in management decisions
such as approving new tenants, setting rental terms and determining
capitol or repair expenditures, then you may shelter up to $25,OOO
against earned salary (etc.), investment income, dividends, gains
from investment sales and interest.
b- This allowance ($25,OOO) for rental real estate, phases out $1
for every $2 when your adjusted gross income exceeds $1OO,OOO. The
allowance is $5O,OOO for a married couple filing separate returns.
c- Your adjusted gross income will be calculated in lieu of any IRA
contributions, taxable social security benefits and passive losses.
d- For individual's with a modified adjusted gross income exceeding
the $15O,OOO level, this allowance will be entirely eliminated.
e- All real estate rental losses are subject to the limitation on
passive activity losses, if an individual's adjusted gross income
exceeds the $15O,OOO level.
Hobby income loss rules:
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a- If you have a hobby that has generated an income for you after
expense deductions, for at least three out of five consecutive tax
years, the IRS will consider your hobby as an activity for profit
and any resulting losses that you have incurred, may be deductible.
b- The time period is extended from two out of seven years, if your
activity consists of breeding, training, showing or racing horses.
Medical deductions:
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a- Your medical expenses must exceed seven and a half percent
(7 1/2%) of your adjusted gross income to qualify as a deduction
and the definition of deductibles has been expanded by the IRS. So-
make plans to take advantage of as many medical deductions as you
can.
b- Deductions can be taken for specific treatments in the areas of
diagnosis for the treatment and prevention of diseases, or for
affecting any structure or function of the body. The deductions
are not allowed for general health improvement.
c- Medical bills for another person can be deducted provided that
you have paid for more than half of that person's support either in
the year that the bills were generated or the year they were paid.
d- You can also deduct bills paid for a former spouse, so long as
you were married at the time when the bills were incurred.
e- Deductions for surgical, hospital and laboratory expenses and
transportation costs for a transplant donor are allowed. A person
that is being considered as a prospective donor, even if found as
unacceptable, can deduct expenses incurred.
f- Recipients paying expenses, will get the deductions.
g- Generally, other deductibles include: birth control pills and
other prescription drugs, vasectomies, legal abortions, face-lifts
and hair transplants.
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