Archives for August 2011

Lower Your 2011 Tax Bill by Going Green With Home Energy Tax Credits

Although the U.S. government's ability to function is heavily dependent upon tax revenue, taxpayers are not completely forgotten about. In fact, the government offers taxpayers breaks for taking certain actions or making certain purchases that are good for themselves, the economy or the environment. One such break is a tax credit available to homeowners who make energy-saving home improvements and upgrades.

Last December, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which extended numerous tax credits to both taxpaying individuals and businesses, including those making home energy improvements. Some of these home energy tax credits will continue to be allowed for the 2011 tax year and beyond, although most are lower than the last two years. Nevertheless, it is well worth the small effort needed to maintain any records so that you can claim these tax credits at the end of the year if you qualify.

Last December, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which extended numerous tax credits to both taxpaying individuals and businesses, including those making green energy improvements. These credits will continue to be allowed for the 2011 tax year, although they are lower than the last two years at just $500 for the lifetime of the taxpayer. Despite this, however, it is well worth the small effort needed to maintain any records so that you can claim these tax credits at the end of the year if you qualify.

The Benefit of Claiming Tax Credits

Unlike a tax deduction, which only lowers your taxable income by the amount of the deduction, a tax credit – as its name suggests – is a credit toward the taxes that you owe. In other words, it is a dollar-for-dollar reduction in tax liabilities. For example, if you owe $1,200 and receive a $500 tax credit, you will only owe $700 on your tax bill. In some cases, tax credits may result in your receiving a refund under circumstances in which you may otherwise have owed money.

Changes to Some Home Energy Tax Credits in 2011

While the good news is that some residential energy tax credits that were set to expire at the end of 2010 are being extended through 2011, the bad news is that there is now a total lifetime cap of $500 for the following energy-efficient improvements:

Heating, Ventilating & Air Conditioning (HVAC) Equipment – Includes furnaces, boilers, air source heat pumps, advanced main air circulating fans and central AC. (Central AC capped at a $300 credit, electric heat pumps capped at a $300 credit, furnaces and boilers capped at a $150 credit, main air circulating fans capped at a $50 credit)
Insulation – Typical bulk insulation products, such as batts, rolls, blow-in fibers, rigid boards, expanding spray and pour-in-place, as well as many products designed to air seal, such as weather stripping, caulk, house wrap and spray foam in a can, are included.
Metal & Asphalt Roofing – Metal roofs are required to have appropriate pigmented coatings, asphalt roofs are required to have appropriate cooling granules, and installation costs are NOT included.
Non-Solar Water Heaters – Includes qualified natural gas, propane or oil furnaces and hot water boilers. (Furnaces are capped at a $200 credit and must be 95% efficient.)
Energy-Efficient Windows, Doors & Skylights – Also includes storm windows and doors. (Credits for windows are capped at $200).
Biomass Stoves – Must have a thermal efficiency rating of at least 75%. Biomass stoves can burn agricultural crops, wood, plants, grasses, residues, and fibers. (Credits for biomass stoves are capped at $300.)

The $500 lifetime cap is a rather significant reduction from the $1,500 cap that existed previously. This means that if you have already received at least $500 total in energy tax credits through 2009 and 2010, you are no longer eligible to claim these tax credits. On the other hand, if you have only claimed a portion of the $500 threshold so far, you are still eligible to claim the remainder of it as long as you make qualified improvements before the end of this year. For example, if you have only used $300 in credits, you still have $200 left for 2011.

Another major change to these energy tax credits this year is that it only extends to 10% of the cost – down from 2009 and 2010, when it was 30% of the cost – so you will need to spend $5,000 in order to receive the full $500 tax credit. However, if you are already planning to make some of these qualifying energy-efficient home improvements discussed above, it is in your best interest to make these changes before the end of 2011. If you are not already planning to upgrade at this time, you may want to consider how much money you will save long-term by upgrading to an energy-efficient appliance sooner rather than later.

If you are eligible for the aforementioned energy tax credits, you must complete any qualifying home improvements before the end of this year in order to receive these tax credits as they will expire on December 31, 2011.

Eligibility Guidelines for the Home Energy Tax Credits Discussed Above

It is important to be aware of the many rules and restrictions limiting what is eligible for the energy tax credit and how much you can claim. You will certainly not want to get to the end of the year thinking that you have tax credits, only to discover that you have purchased and installed ineligible systems.

The residential energy tax credits are a bit complicated in that:

Improvements must be made to an existing home
Improvements must be made to your principal residence
Only certain home improvements are eligible
Only certain appliances and systems are eligible
There are individual caps on many items.

Home Energy Tax Credits Through 2016

Fortunately, many residential energy tax credits will not expire till December 31st, 2016. These include geothermal heat pumps, small wind turbines and solar energy systems, as well as residential fuel cell and microturbine system installations. The first three aforementioned home improvement energy tax credits have no upper limit or cap and can get you a tax credit of up to 30% of the total cost (including installation costs). For residential fuel cell and microturbine system installations, you can obtain a tax credit for 30% of the total cost (including the installation) up to $500 per .5kW of power capacity.

Eligibility Guidelines for Home Energy Tax Credits Through 2016

Just like the other home energy tax credits expiring this year, there are some limitations on the energy tax credit. However, these limitations are much less restricting. Here are the major differences in the limitations:

Improvements may be made to an existing and new construction homes
Improvements may be made to your primary residence and your second home (except for fuel cells which only qualify for your primary residence)
There are no individual caps.

Claiming Energy Tax Credits on Your 2011 Tax Return

In order to claim energy tax credits on your 2011 tax return, you must take the following steps:

Plan your home improvements wisely and consult the ENERGY STAR website to see which improvements are eligible to claim, and whether you can claim installation costs for certain systems and improvements
Keep your receipts and Manufacturer's Certification Statements in a special folder so that you can add them up at the end of the year. You must be very clear about which items you purchased during the year.
Record your spending on IRS Form 5695 and submit it with your 2011 tax return. On IRS Form 1040, the residential energy tax credit is claimed on line 52.

Learn More

You can obtain more information, eligibility requirements and other details on qualifying products at both Alliance to Save Energy and ENERGY STAR. Or consult a tax professional to see how you may be able to benefit from the residential energy tax credit, as well as the many other tax breaks available.

For you, as the taxpayer, making home improvements that save energy creates a win-win situation, where not only will you reap a short-term benefit by receiving the tax credit, but you will also enjoy the long-term advantage of saving a great deal of money on your energy bills.

This guest post was provided by Manny Davis. His website contains a frequently updated tax blog with tax news, tax changes and tax saving tips, as well as detailed guides to help people through various tax related problems.

Buying A Used Car? Watch Out For Flood Damage

By Miranda Marquit 3 Comments

One of the ways you can save money when you purchase a car is to buy it used. Used cars can provide you with a great way to get from here to there — without breaking the bank. Plus, you avoid the instant depreciation that comes the moment you drive a new car off the lot.

You still need to be careful, though. Thanks to the high water in many parts of the country during the spring or hurricane season, there has been an increase in the number of used cars on the market that have been damaged by flooding.

Car With Flood Damage

Why You Don't Want A Car With Flood Damage

Before you buy a car, you need to understand that there are a number of problems that can come with flood damage to a car. When that much water infiltrates anything — especially if it sits — there can be very real problems. Some of the issues that comes with flooding include:

Mold and mildew: So much moisture can lead to mold and mildew in the car. This can ruin carpeting in your car, as well as smell nasty. Mold and mildew can also trigger allergies in some people, making it very unpleasant to be in your car, and further destroying what's left of the car's value.
Electrical problems: All that water in the car can damage electrical systems. This means that you could end up with shorts in the system, or components not working right. You might buy the car, only to find that it needs expensive repairs on the electrical system.
Body damage: Peeling paint can result from flood damage, but one of the real issues is rust. Flood damage can accelerate the rate at which the car rusts, and that can lead to expensive structural problems.

Sometimes, flood damage isn't obvious, though. Many sellers try to cover it up with new paint, and with other gimmicks. If you just give the car a once-over, you might not realize that the car has been in a flood.

Avoid Buying A Flood Damaged Car

Most states have laws that require that title documents reflect flood damage, or mention that a car has been through a flood. However, this doesn't protect you in instances when the state doesn't have such a law — or if someone flouts the law. You can check a Carfax report to see about flooding (most reputable dealers will provide you with a free Carfax), but sometimes the flooding happened too recently, or some method was used to avoid having the information reflected on Carfax. You can also get a free report at www.nicb.org, the site of the National Insurance Crime Bureau. Always inspect the title of the car, and ask for the former owner's contact information if you are buying from a dealer.

As you look over the car, check carefully for signs of possible water damage. You should also have your used car inspected by a mechanic you trust. This typically won't cost very much, and it can provide peace of mind as you buy the car. Plus, a good mechanic will be able to spot the tell-tale signs of flood damage — and attempts to cover it up.

How To Invest Money For Your Kids

By Contributor 2 Comments

According to the United States Department of Agriculture (USDA), the average cost of raising a child rose to over $222,000 in 2009. (1) The 2010 annual Expenditures on Children by Families report revealed that the cost of raising a child rose by less than 1 percent from 2008. A big portion of this expense goes towards paying for college. According to a report published in the Christian Science Monitor, the cost of college has risen 440 percent over the past 25 years, four times higher than the inflation rate. (2) The schools with the best reputations cost upwards of $200,000 for four years.

Parents have to start planning early to invest on behalf of their children. Starting an Individual Retirement Account (IRA) or a 529 savings plan or other tax-advantaged account will help parents provide for their children when they come of age. In tough economic times, planning ahead for favorable and unfavorable circumstances is paramount to helping one's children have a successful life.

Setting Up An Account

Three questions must be answered. Who will own the account? What type of account will it be? What kind of assets will the account hold? These questions will decide the entire account ahead of time, avoiding confusion and errors due to changing circumstances. The goal of the account is to accumulate the largest amount of cash possible after taxes while compensating for inflation. A secondary goal is to teach children about investing as they grow older.

Generally speaking, it is best for the account to be in the parent's name but have a legal structure in place that transfers it to the child when he reaches the age of maturity. A custodial account answers this purpose very well. A custodial account's earnings are taxed at the child's tax rate instead of the parents’. In other words, taxes are practically nonexistent, allowing 18 years or more of compounding returns.

Retirement

The stock crashes of 2000 and 2008 wreaked havoc on the portfolios of future retirees. Subsequently, most of them have had to postpone their retirement dates or cancel them completely. Traditional IRAs and Roth IRAs are both tax-advantaged, but a Roth IRA is more flexible which can help when raising a child. The contributions, but not the earnings, from a Roth IRA can be withdrawn tax-free at any time for any reason. Traditional IRAs impose a 10 percent penalty for the same action.

Unfortunately, only $2,000 per year can be contributed to a Roth IRA. What's more, if the Roth IRA will be in the child's name, he has to earn money in order to have one. This means having a Roth IRA in the child's name is not feasible until he is old enough to work.

Saving for College

After retirement, the next most important goal is college. Again, the cost of college has risen four times faster than inflation over the past quarter century. One of the easiest ways of saving the amount needed to pay for college is a 529 plan. Signed into law in 1996, a 529 plan's earnings accumulate and grow tax-deferred. Distributions for educational expenses are tax-free and penalty-free. The 529 plan is a state-sponsored plan, which means that the state sets up the plan with an asset management company. The parent then opens a 529 account with the company.

529 plans actually come in two types. The first type is the tax-advantaged account, and the second type allows the parent to prepay tuition by purchasing credits at current tuition rates for the beneficiary. Most parents prefer the tax-deferred account to take advantage of compounding returns.

References

(1) http://www.cnpp.usda.gov/Publications/CRC/2010CRCPressRelease.pdf
(2) http://www.csmonitor.com/layout/set/print/content/view/print/402577

Tal Baron writes for Currensee, a FOREX trading social network offering some of the best investments in currencies.

Is Your Home Really Going To Be A Retirement Asset?

By Miranda Marquit 4 Comments

Many of us were raised to believe that buying a home is the key to a stable financial future. It is true that your home is likely to be your biggest purchase, but it may not do to rely too heavily on your home's equity for retirement.

The theory is nice: You buy a house, pay it off over 30 years, and when it's time to retire you have this huge asset, which has appreciated in value, ready to be tapped. Before you get excited about the prospect, though, it's a good idea to take a step back and evaluate whether or not your home will really be the asset you think.

Home Equity

Will It Appreciate As Much As You Think?

The first thing you have to consider is whether or not your home will appreciate as much as you think. You will need to consider the costs of home ownership, including the interest that you pay, as well as maintenance and upkeep. You can expect to offset some of the costs of interest and property taxes with the help of tax breaks, but you can't expect those to last forever. You will have to consider the effects of inflation as well.

The other issue, of course, is whether or not a market crash happens just before you retire. Many people who had depended on their homes for retirement received a rather unpleasant surprise after the recent real estate bubble burst and home values plummeted. Suddenly, the expected value disappeared.

While your home can be an asset to draw on later, you might not want to rely too heavily on the expected equity in your home to fund your retirement. Like any other asset that we expect to appreciate in value, there is the risk of loss, and you can't predict what the market will do. A little diversity is usually in order.

Tapping Your Home Equity

One of the reasons that many buy a home is for the ability to tap the equity later. However, tapping your home's equity comes with its own costs. You will have to pay even more in interest, since you will have to borrow against the equity in your home to access it. If you are retired, you may have difficulty getting a traditional home equity loan, since you will need income. You might have to use a reverse mortgage. While you won't have to repay the mortgage until the house is sold, or you stop living in the house, many reverse mortgages have steep fees and interest rates, and can erode the amount you receive.

Of course, you can sell your home to downsize. If you have paid off your mortgage, you can sell, and then use the resulting capital to buy a smaller home, or invest the capital for income. (Or, if you have enough left over, you could buy a smaller home and invest.)

Bottom Line

If all goes to plan, it is quite possible that your home can be a place for you to live, as well as provide you with an asset to use to your advantage during retirement. However, it is important to understand that you might not end up with what you expect, and to consider making any real estate asset a part of your larger retirement portfolio, adding diversity.

Long Term Care Insurance Decision – Should You? Which One?

By Contributor 4 Comments

In the vast world of all kinds of insurance products, include finger insurance for a pianist, long term care insurance often takes the back burner because it is typically not considered until later in life and thus “skips the mind” per se.

I was recently involved in the process of researching, screening and executing a long term care agreement for my aging parents. Because my parents are not formally educated, and because they are immigrants who moved to America rather late in life, they rely on their kids (me) for these matters (and rightfully so).

So in this guest post I will share what I have learned about long term care (LTC) insurance and some of the best companies out there offering it.

long term care insurance

Long Term Care Insurance: What Is It?

LTC insurance mainly helps pay for long term care needs such as nursing home admission for senior citizens or in home health care assistance as one gets older. Because most of us don’t really think of LTC day to day, most of us have no true idea of how much this type of care can cost. We all typically do agree that it is EXPENSIVE.

And with average life expectancies on the rise, I learned in my research that more than 50% of Americans will spend at least part of their golden years needing long term care. Sure, medical care is better and we are more aware of what we eat and what it does to us, but no one can defy the law of nature; aging and a deteriorating physical condition.

As I was researching cost trends, I came to know that approximately 12 million Americans needed LTC about 12 years ago, with the average cost at $50,000 per year. Inflation adjusted cost in today’s terms is roughly $75,000. This number is projected to rise to near $300,000 in another 20 or so years. Yup, I too was shocked and in recovery mode for at least 8 minutes after reading that fact. I just couldn’t digest it.

The bottom line of all the research led to me acquiring a LTC policy on behalf of my parents. Why did I decide to do this? Because they fit three key criteria which I hope you find useful:

LTC insurance is not for someone who has gobs of money (which in my estimation is $2M or more in today’s dollars), or for someone who doesn’t have a lot of wealth / assets. The premiums are hefty! My parents fit this criteria.

LTC insurance can be bought at anytime, but after numerous consultation sessions with “experts”, the best time to buy seems to be between 55 and 65. My parents fit this range.

Finally, there are many companies in this space. You shouldn’t even consider any company that has less than an A+ rating. You can independently validate each company’s rating and don’t have to rely on what they tell you. Why does this matter? Highly rated companies do not tend to sneak in steep price increases in your premiums. Second, you want these companies to be around to fund your LTC needs if and when you need them.

Finally, the best three companies that I concluded on after conducting all the research are Mass Mutual (A++), Northwestern Mutual (A++) and State Farm (A++).

I did call USAA (A++) as well and loved everything about what I heard. Unfortunately my parents do not qualify as they don’t have military history. I on the other hand, because of my military history, will likely subscribe to USAA’s plan if and when time comes and I feel I need / want it for my wife and I.

I tried my best not to recommend any specific company because I am not affiliated with anyone. But I hope the three guidelines proved useful.

Readers: What’s your take on LTC insurance? Do you / will you have one? Why or why not?

Sunil owns over a dozen profitable niche websites and is the author of “How to Go from $0 to $1,000 a month in Passive and Residual Income in Under 180 Days All in Your Spare Time”, a FREE report you can download instantly from his Extra Money Blog, where he discusses how to create multiple streams of passive and residual income, entrepreneurship, internet marketing, blogging and personal finance. In 2007, he sold his ecommerce website for $250,000 to a top Ebay Power Seller and since then has sold several niche sites for five figures each. You can read more about him and his work on his blog.

How To Avoid Rising Healthcare Costs

By Contributor Leave a Comment

The downgrade of the U.S.'s credit rating from AAA to AA may not seem to directly impact you yet. Sure, gas prices have dropped which is beneficial, but there are other costs that will soon rise looming on the horizon – and food and healthcare costs are just a few of those expected to increase in costs.

Healthcare, in particular, is expected to see a spike in price, and those enrolled in medical and nursing schools are already gearing up for the challenge these price hikes with bring. Higher prices will generally prevent individuals from seeking health care services until they are already too sick. However, there are ways to keep your health care costs low while still receiving the quality care you need to do the following things.

Health Care Costs

Know What Your Insurance Offers

Because of the rising costs in healthcare, you need to remain aware of any changes that may occur in your health insurance. Some providers may change the amount they are willing to cover for certain procedures, or reduce the number of cost-free visits they allow. They may also increase your co-pay. To ensure that you aren't left with large bills, review your health insurance policies to determine what is and isn't covered.

Choose Urgent Care over Emergency Room

Most health insurance policies offer a good co-pay rate for urgent care visits, but offer little help for emergency room visits. Emergency room visits often cost triple the amount of an urgent care visit so if you can stand to wait, always choose the urgent care unit. A sprained ankle or a cut may hurt now, but a $400 bill from the emergency room will sting a lot worse than the $50 you would have paid for the urgent care visit.

Choose Out-Patient Services

Hospitalization is one of the highest costs to any patient, and as health care costs increase you can expect that $9 band aid to increase to a $15 band aid. If you must have surgery, opt for an out-patient or same day surgery. You won't have to pay for overnight expenses, and your hospital bill will be practically cut in half.

Always Review Your Bills

The healthcare industry frequently makes errors when billing individuals. Hospitals and clinics deal with hundreds of patients on a monthly basis, and on occasion, a patient is billed for another patient's procedures or medical supplies used. Always review your bills before paying so that you only pay for the treatment you received.

Take Care Of Yourself

While we can't always avoid getting sick, we can take better care of ourselves to prevent frequent sickness. Try to maintain a balanced diet, exercise, drink plenty of fluids, and take a multivitamin. Also, routinely give yourself the appropriate self-examinations so that you may find small issues before they become large health concerns and possibly large bills.

Everyone is trying to reduce their spending so that they can survive the downturned economy, but you shouldn't have to risk your health to do so. Healthcare may be expensive, but you can avoid paying outrageously high prices by simply remaining aware of who is taking care of you and the treatments you are receiving.

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