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$250,000 Bank Deposit Account Insurance Limit Extended

On May 20, 2009, President Obama signed the Helping Families Save Their Homes Act of 2009. Included in the legislation was a provision that postpones until January 1, 2014 the expiration of the $250,000 limit on Federal Deposit Insurance Corp. (FDIC) insurance for bank deposit accounts. The limit was raised in 2008 from $100,000 per depositor at a given institution, and had been scheduled to revert to the previous $100,000 limit on December 31, 2009.

The legislation covers all account categories other than: (1) IRAs and certain other retirement accounts, which will continue to be covered up to $250,000 per owner after January 1, 2014, and (2) non-interest bearing transaction deposit accounts, which temporarily have unlimited coverage and are insured under the Transaction Account Guarantee Program, which is still scheduled to expire after December 31, 2009.

The Act also extended to January 1, 2014 the National Credit Union Share Insurance Fund’s $250,000 share insurance coverage of accounts at credit unions.

Income Tax Considerations for Homeowners

Introduction

Home ownership confers many benefits, including federal income tax advantages. In particular, you may be able to deduct your mortgage interest payments. In addition, special rules apply to the tax treatment of points, closing costs, home improvements, and repairs.

For information about deducting your property taxes, see our separate topic discussion, Property Taxes. For information about home sales, see our separate topic discussion, How Home Sales Are Taxed.

Tip: This discussion applies to your principal residence only. For tax rules surrounding second or vacation homes, see our separate topic discussion, Special Considerations for Second/Vacation Homes.


First-time homebuyer tax credit

The Housing and Economic Recovery Act of 2008 established a temporary refundable first-time homebuyer credit equal to 10 percent of the purchase price of a principal residence, up to $7,500 ($3,750 if married filing separately). The credit applies to first time homebuyers (individuals who have had no ownership interest in a principal residence for three years) who purchase a qualifying home on or after April 9, 2008 and before July 1, 2009. The credit is phased out for higher incomes, and must be paid back over 15 years in equal installments.

The American Recovery and Reinvestment Act of 2009 (the Act):

· Extends the existing homebuyer credit for qualifying home purchases before December 1, 2009,
· Increases the maximum credit amount to $8,000 ($4,000 for a married individual filing separately), and
· Waives the recapture of the credit for qualifying home purchases after December 31, 2008 and before December 1, 2009. This waiver of recapture applies without regard to whether the taxpayer elects to treat the purchase in 2009 as occurring on December 31, 2008.

Caution: If the home is disposed of or the home otherwise ceases to be the individual’s principal residence within 36 months of the date of purchase, the previous rules for recapture of the credit will apply.

Tip: The Act also modifies the coordination with the first-time homebuyer credit for residents of the District of Columbia under IRC Section 1400C, and removes the prohibition on claiming the first-time homebuyer credit if the residence is financed by the proceeds of a tax-exempt mortgage revenue bond.


Additional standard deduction for non-itemizers

Homeowners can claim an additional standard deduction for property tax if the taxpayer does not itemize. The additional amount that can be claimed is the lower of:

  • The amount of real estate property taxes paid during the year to state and local governments; or
  • $500 ($1,000 if married filing jointly)

This additional standard deduction applies to tax years beginning in 2008 and 2009 only.

Can you deduct your mortgage payments?

With most mortgages, part of each monthly payment is applied to the outstanding principal on your mortgage loan, and part is applied to the mortgage interest. If you itemize deductions on Schedule A of your federal income tax return, the part that is applied to mortgage interest may be deductible.

Mortgage taken to buy, build, or improve your home

You may be able to deduct qualified interest you paid on a mortgage to buy, build, or improve your principal home or second home, provided that the loan is secured by your home. More specifically, you may be able to deduct interest on up to $1 million of such mortgage debt ($500,000 if you're married and file separately). If your mortgage loan exceeds $1 million, some of the interest that you pay on the loan may not be deductible.

Tip: Different rules apply if you incurred the debt before October 14, 1987. All loans taken on and secured by your primary residence and one second residence prior to October 14, 1987--no matter how the proceeds are used--are considered "grandfathered" debt. All interest paid on such grandfathered debt is deductible, even if the total debt exceeds $1 million.

Tip: Special rules apply to the deduction of interest paid on a home construction loan.

Tip: For 2007 through 2010 only, premiums paid or accrued for qualified mortgage insurance is treated as deductible mortgage interest. Qualified mortgage insurance means mortgage insurance provided by the VA, FHA, and Rural Housing Authority as well as private mortgage insurance (PMI). The amount of the deduction is phased out if your AGI exceeds $100,000 ($50,000 if married filing separately). This provision does not apply with respect to any mortgage contract issued before January 1, 2007 or after December 31, 2010.


Home equity debt

You may also be able to deduct the interest you pay on certain home equity loans. However, the rules are different. (Home equity debt involves a loan secured by your main or second home that exceeds the outstanding mortgages on the property.) The interest that you pay on a qualifying home equity loan is generally deductible regardless of how you use the loan proceeds (unless you use the proceeds to purchase tax-exempt vehicles). In other words, the loan doesn't have to be made to buy, build, or improve your residence.

Deductible home equity debt is limited to the lesser of:

  • The fair market value of the home minus the total acquisition debt on that home, or
  • $100,000 (or $50,000 if your filing status is married filing separately) for main and second homes combined

Example(s): You bought a home some years ago for $180,000, taking out a mortgage of $130,000 to do so. The $130,000 is considered home acquisition debt. The fair market value of the home has now increased to $195,000, and the principal balance on the loan has been paid down to $110,000. You decide to take out a home equity loan of $90,000. You may deduct interest paid on $85,000 of the $90,000 home equity loan. Why? Interest cannot be deducted on the home equity debt that exceeds the difference between the fair market value of the residence ($195,000) and the principal owed on the acquisition debt ($110,000) at the time the home equity loan is taken.

If you refinanced your mortgage instead of taking out a home equity loan, see our separate topic discussion, Refinancing.

How are points and closing costs treated for tax purposes?

When you buy a home or refinance an existing loan on your home, you'll incur settlement charges. These usually include both points and closing costs, such as attorney's fees, recording fees, title search fees, appraisal fees, and loan preparation fees. The income tax treatment of these settlement charges depends on the type of charge and (in some cases) the type of loan.

Deducting points when you buy a home

Points are costs that your lender may charge when you take out a loan secured by your home. One point equals 1 percent of the loan amount borrowed (e.g., 1.5 points on a $100,000 loan equals $1,500). If you itemize your deductions on Schedule A of your federal income tax return, and if your lender charges the points as up-front interest and in return gives you a lower interest rate on the loan, the points may be deductible.

Tip: It doesn't matter whether your lender calls the charge points or a loan (or mortgage) origination fee. If this charge represents prepaid interest, it may be deductible.

If you take out a mortgage to buy or improve your home and pay points, you can deduct the points in the year they're paid if you meet all of the following conditions:

  • Your loan is secured by your main home
  • Paying points is an established business practice in the area where the loan was made
  • The points paid were not more than the points generally charged in that area
  • You use the cash method of accounting (most individuals use this method)
  • The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes
  • The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged
  • You use your loan to buy or build your main home
  • The points were computed as a percentage of the principal amount of the mortgage
  • The amount is clearly shown on the settlement statement as points charged for the mortgage. The points may be shown as paid from either your funds or the sellers

If you don't meet the above conditions, you must amortize your deduction of the points over the term of the loan. If the loan ends early (because, for example, you sell the home or refinance the mortgage), you may fully deduct the remaining points for the tax year the loan ends. For more information on deducting points, see IRS Publication 936.

Tip: If the seller pays your points, they may also be deducted as an up-front interest charge. However, because they are also considered a reduction in the cost of the home, you must lower your cost basis in the home by an amount equal to the points paid by the seller.

Tip: For information about deducting points charged on a mortgage secured by a second home, see our separate topic discussion, Special Considerations for Second/Vacation Homes.

Deducting points when you refinance your mortgage

Refinanced loans are treated differently. The points you pay on a refinanced loan generally must be amortized over the life of the loan. In other words, you can deduct a certain portion of the points each year. But there's one exception: If part of the loan is used to make improvements to your principal residence, you can generally deduct that portion of the points in the year the points are paid.

Example(s): Suppose you take a cash-out refinance mortgage for $100,000 and pay two points ($2,000). You use $90,000 to pay off the principal debt owed on the old mortgage, $4,000 to pay off bills, and $6,000 to install new kitchen cabinets. Because 6 percent ($100,000 divided by $6,000) is used for home improvements, $120 worth of points (6 percent of $2,000) may be deducted in the year the loan is taken. The remaining $1,880 in points must be deducted ratably over the life of the loan.

Tax treatment of closing costs

Generally, you can't deduct closing costs on your tax return. Instead, you must adjust your tax basis (i.e., the cost, plus or minus certain factors) in your home. If you're buying a home, you'd increase your basis by the amount of certain closing costs that you've paid.

Example(s): Your closing costs on a loan you take to purchase a $200,000 home total $3,000. Your closing costs would increase your cost basis in that home to $203,000.

Caution: Escrow fees that you pay at closing to cover costs that you must pay later (e.g., hazard insurance premiums) are not added to the basis of your home.

What is the tax treatment of home improvements and repairs?

Home improvements and repairs are generally nondeductible. However, a distinction is made between improvements and repairs, and they're treated differently for tax purposes.

Home improvements

Improvements can increase the tax basis of your home (which in turn can lower your tax bite when you sell your home). Improvements add value to your home, prolong its life, or adapt it to a new use. For example, the installation of a deck, a built-in swimming pool, or a second bathroom would be considered an improvement.

Tip: You may be entitled to one or more tax credits for making certain energy-saving home improvements.

Home repairs

In contrast, a repair simply keeps your home in good operating condition. Regular repairs and maintenance (e.g., repainting your house and fixing your gutters) are not considered improvements and are not included in the tax basis of your home.

Tip: However, if repairs are performed as part of an extensive remodeling of your home, the entire job may be considered an improvement.

Protection for Investors' Brokerage Accounts

Covering your investment assets

Most brokerage accounts are protected by the Securities Investor Protection Corp (SIPC). Unlike the FDIC, which provides coverage for bank deposit accounts, the SIPC is not a governmental agency. Though created by Congress, it is a nonprofit corporation funded by its membership, which is comprised of broker-dealers registered with the Securities and Exchange Commission. (Any broker-dealer that is not an SIPC member must disclose that fact to customers.)

SIPC was created by Congress in 1970 to help return customer property, including both securities and cash in brokerage accounts, should a broker-dealer or clearing firm go bankrupt, become insolvent, or experience unauthorized trading in a customer's securities account. Many brokerages also carry additional private insurance to extend coverage beyond the SIPC limits. Should an SIPC member firm become insolvent, SIPC would either ask a court to appoint a trustee to supervise the transfer of customer securities to another member firm, or act as the trustee itself.

It's important to know the types of accounts and securities that qualify for this protection, as well as the maximum amounts that can be held in each account and still qualify for SIPC coverage. Otherwise, an investor's account might inadvertently have less coverage than expected. And though any excess amounts might be safe, any protection beyond the SIPC limits isn't necessarily assured. On the other hand, if money is distributed appropriately among various types of accounts, an investor may be able to qualify for greater protection at a single institution.

How much is covered?

SIPC covers a maximum of $500,000 per "separate customer," including up to $100,000 in cash, at a given brokerage house or clearing firm. Total coverage can be higher for multiple accounts at one institution, depending on how they're held. For example, a married couple could have two individual accounts with $500,000 of coverage each, plus a joint account that would bring their aggregated coverage for that firm to $1.5 million.

As long as accounts are held by what the SIPC considers "separate customers," each account qualifies for separate SIPC coverage. Categories of separate customers include:

  • Individual accounts: those held by someone in his or her own name, or by an agent for another individual
  • Joint accounts: those held jointly by two individuals with equal authority over the account
  • Accounts held by executors, administrators, and guardians: those held in the name of a decedent, an estate, or an executor or administrator, or guardian (for example, for an UTMA account)
  • Accounts held by a corporation, partnership or unincorporated association
  • Trust accounts: those held on behalf of a valid trust created by a written instrument (trust accounts are considered separately from those of an individual trustee)

Each of your retirement accounts at a given firm also is generally eligible for an additional $500,000 SIPC coverage (including up to $100,000 in cash) in the event that securities in your account are lost or stolen.

Many brokerage firms also carry private insurance to cover problems with amounts above those that qualify under SIPC guidelines.

What qualifies for SIPC protection?

It's important to remember that SIPC does not protect against market risk or price fluctuations; if shares drop in value before a trustee is appointed, that loss of value is not covered by SIPC. The value of securities is determined as of the date upon which a trustee is appointed. In general, SIPC covers notes, stocks, bonds, mutual funds, and other shares in investment companies. It does not cover investments that are not registered with the SEC, such as certain investment contracts, unregistered limited partnerships, fixed annuity contracts, currency, gold, silver, commodity futures contracts, or commodities options.

Tip: SIPC protection applies only if a brokerage firm fails or experiences a theft of assets. It does not cover losses that result from fraudulent investments.

SEC protections

The Securities and Exchange Commission (SEC) also has provisions that can help protect investor assets. For example, the SEC requires brokerage and clearing firms to segregate money and securities in customer accounts from their own proprietary assets and funds. This can help protect customers from being harmed by a firm's own trading activity. Also, firms are required to maintain a certain level of capital reserves that would enable the firm to return customers' securities and cash in the event of a financial failure. The SEC specifies that customer claims are senior to other claims on a firm's assets.

Should the SIPC fund be deemed insufficient to meet investor claims--something that has never happened since the organization was created--SIPC has the authority to tap a line of credit set up with a consortium of banks. And if necessary, the SEC also is authorized to lend SIPC up to $1 billion, which the SEC would borrow from the U.S. Treasury.

How securities are returned to customers

In the event a firm is liquidated, any securities that are registered in a customer's name or in the process of being so registered (as opposed to being held in "street name," the most common form in which securities are held today) are returned to customers first. Assets held in street name make up what's known as the "fund of customer property." That fund is divided on a pro rata basis, with the assets shared in proportion to the size of claims. Only if securities are still missing after the pro rata distribution would SIPC coverage be applied to make up the difference, up to the statutory coverage limit. In the event of a liquidation, individual customers must file a claim with the designated trustee to ensure that their assets are recovered. Claim forms are available at www.sipc.org, where you also can check on the status of a liquidation proceeding.

Example(s): In the process of liquidating ABC Company, the trustee discovers that 97% of the pool of customer assets is intact, but 3% cannot be accounted for. Each customer would receive 97% of the property in his or her account, and SIPC would then make up the remaining 3% up to the applicable coverage limits.

Help protect your assets

  • Know whether or not your brokerage accounts are at SIPC member firms, and consider the coverage limitations for each account and for aggregated amounts.
  • Review and check all documentation, including trade confirmations and account statements, to ensure accuracy.
  • Make payments to the firm rather than to an individual, and send them to the appropriate business address.
  • Ensure that all records, such as addresses and beneficiary forms, are up to date and accurate. If dealing with a trustee for a failed firm, make sure the trustee has your correct, current address.
This article was provided by Forefield and distributed by Lawrence Sprung.

Teaching Your Child about Money

Ask your five-year old where money comes from, and the answer you'll probably get is "From a machine!" Even though children don't always understand where money really comes from, they realize at a young age that they can use it to buy the things they want. So as soon as your child becomes interested in money, start teaching him or her how to handle it wisely. The simple lessons you teach today will give your child a solid foundation for making a lifetime of financial decisions.

Lesson 1: Learning to handle an allowance

An allowance is often a child's first brush with financial independence. With allowance money in hand, your child can begin saving and budgeting for the things he or she wants.
It's up to you to decide how much to give your child based on your values and family budget, but a rule of thumb used by many parents is to give a child 50 cents or 1 dollar for every year of age. To come up with the right amount, you might also want to consider what your child will need to pay for out of his or her allowance, and how much of it will go into savings.
Some parents ask their child to earn an allowance by doing chores around the house, while others give their child an allowance with no strings attached. If you're not sure which approach is better, you might want to compromise. Pay your child a small allowance, and then give him or her the chance to earn extra money by doing chores that fall outside of his or her normal household responsibilities.

If you decide to give your child an allowance, here are some things to keep in mind:

  • Set some parameters. Sit down and talk to your child about the types of purchases you expect him or her to make, and how much of the allowance should go towards savings.
  • Stick to a regular schedule. Give your child the same amount of money on the same day each week.
  • Consider giving an allowance "raise" to reward your child for handling his or her allowance well.

Lesson 2: Opening a bank account

Taking your child to the bank to open an account is a simple way to introduce the concept of saving money. Your child will learn how savings accounts work, and will enjoy trips to the bank to make deposits.
Many banks have programs that provide activities and incentives designed to help children learn financial basics.

Here are some other ways you can help your child develop good savings habits:

  •  Help your child understand how interest compounds by showing him or her how much "free money" has been earned on deposits.
  • Offer to match whatever your child saves towards a long-term goal.
  • Let your child take a few dollars out of the account occasionally. Young children who see money going into the account but never coming out may quickly lose interest in saving.


Lesson 3: Setting and saving for financial goals

When your children get money from relatives, you want them to save it for college, but they'd rather spend it now. Let's face it: children don't always see the value of putting money away for the future. So how can you get your child excited about setting and saving for financial goals?

Here are a few ideas:

  • Let your child set his or her own goals (within reason). This will give your child some incentive to save.
  • Encourage your child to divide his or her money up. For instance, your child might want to save some of it towards a long-term goal, share some of it with a charity, and spend some of it right away.
  • Write down each goal, and the amount that must be saved each day, week, or month to reach it. This will help your child learn the difference between short-term and long-term goals.
  • Tape a picture of an item your child wants to a goal chart, bank, or jar. This helps a young child make the connection between setting a goal and saving for it.
  • Finally, don't expect a young child to set long-term goals. Young children may lose interest in goals that take longer than a week or two to reach. And if your child fails to reach a goal, chalk it up to experience. Over time, your child will learn to become a more disciplined saver.

Lesson 4: Becoming a smart consumer

Commercials. Peer pressure. The mall. Children are constantly tempted to spend money but aren't born with the ability to spend it wisely. Your child needs guidance from you to make good buying decisions.

Here are a few things you can do to help your child become a smart consumer:

  •  Set aside one day a month to take your child shopping. This will encourage your child to save up for something he or she really wants rather than buying something on impulse.
  • Just say no. You can teach your child to think carefully about purchases by explaining that you will not buy him or her something every time you go shopping. Instead, suggest that your child try items out in the store, then put them on a birthday or holiday wish list.
  •  Show your child how to compare items based on price and quality. For instance, when you go grocery shopping, teach him or her to find the prices on the items or on the shelves, and explain why you're choosing to buy one brand rather than another.
  • Let your child make mistakes. If the toy your child insists on buying breaks, or turns out to be less fun than it looked on the commercials, eventually your child will learn to make good choices even when you're not there to give advice.

Deducting Sales and Excise Tax on a New Vehicle Purchase

If you recently purchased a new vehicle, or intend to purchase one by the end of the year, you may benefit from a temporary new deduction created by the American Recovery and Reinvestment Act, which was signed into law in February.

As a result of this legislation, if you purchase a new passenger automobile, light truck, or motorcycle (vehicles must have a gross weight rating of no more than 8,500 pounds) on or after February 17, 2009, and before January 1, 2010, you'll generally be able to deduct any state or local sales and excise tax you pay on the purchase on your 2009 federal income tax return. New motor home purchases can qualify as well.

Individuals who itemize deductions on Form 1040, Schedule A, can include state or local sales and excise tax as part of their deduction for taxes paid. If you don't itemize deductions, you can deduct the qualifying sales and excise tax as part of your standard deduction.

There are, however, a couple of limitations:

-The amount of sales and excise tax that you can deduct is capped at the amount that would be paid on a vehicle with a purchase price of $49,500. So, if you purchase a $100,000 motor home, only the sales and excise tax attributable to the first $49,500 of your purchase price is deductible.

-You're not entitled to a deduction if your modified adjusted gross income (MAGI) is greater than $135,000 ($260,000 if you are married and file a joint return). And you're only entitled to a partial deduction if your MAGI is between $125,000 and $135,000 (between $250,000 and $260,000 if you are married and file a joint return).

Note: For 2009, you already had the option to deduct general state and local sales tax in lieu of state and local income taxes--the new rules allow you to deduct the state or local sales and excise tax attributable to a new vehicle purchase in addition to state and local income tax. The new rules are also more generous in cases where your state imposes sales tax on a new vehicle purchase at a rate that's higher than the general sales tax rate: the temporary deduction rules allow you to deduct the actual tax paid (subject to the limits noted above) instead of limiting you to the tax that would have been paid under the general sales tax rate.

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