1. Energy Efficiency Credit. If you purchased windows, doors, a furnace, boiler, water heaters, or insulation you may be eligible for a deduction up to 30% of the costs up to $1,500. Energy star ratings apply and more information/qualifications can be found at http://www.energystar.gov/index.cfm?c=tax_credits.tx_index -or- http://www.irs.gov/newsroom/article/0,,id=211307,00.html

2. Sales Tax Deduction on a New Vehicle Purchase. If you purchased a new vehicle you can use the sales tax you paid as a deduction on your tax return. Previously, sales tax was deductible but only if it exceeded your state income tax, so most people did not benefit from it. At tax time: bring your sales receipt(vehicle price, sales tax paid, and dealership information.

3. Excluded Unemployment Benefits. If you received unemployment benefits in 2009 the first $2,400 received will be considered excluded from your 2009 federal return (not Minnesota return).

4. Increased Education Credit. If you or your dependent paid qualified education expenses this year you may be eligible for an increased maximum Hope education credit of $2,500. The Hope credit has now been made available for four years of higher education as opposed to just two in the past.

5. First Time Homebuyer Credit. This credit has been extended until April 2010 and offers first time homebuyers a tax credit of $8,000 on their taxes. In addition, taxpayers who have lived in a home for five of the past eight years are also eligible for a credit of $6,500. A frequently asked questions page regarding these credits are available at www.bergersontax .com or more information at irs.gov.

6. Making Work Pay Credit. Individual with earned income may have received a tax credit of $400 or $800 for married filing jointly. They received this credit through their employer throughout 2009. This will have a negative result for the taxpayers at tax time as their refunds will be reduced by this much or their balance due will be increased.

7.       Conversion of IRAs to ROTH IRAs allowed in 2010.  Some individuals are given the opportunity to convert their traditional or rollover IRAS into ROTH IRAS thus creating after tax dollars allowing for tax deferred and tax-free accounts.  More information on this great opportunity is available on our website at  http://bergersontax.com/tax-form/2009/10/21/great-opportunity-to-save-taxes-thanks-to-legislation-changes/

7 Tips to Help Boost Your Financial Situation

As 2009 comes to an end we look toward 2010 and if you are like me you begin thinking about your New Years Resolutions. Exercise more and lose 10 pounds, spend more quality time with our families, work harder and get that promotion at work, etc, etc.  How about creating a New Years Resolution to perk up your financial situation.  It is natural to put it off and say you will get to it next week, next month, next year but like most everybody, we never get around to it, much like getting that gym membership to start that exercise program and dropping that ten pounds.  I encourage you to make this the time and make it your New Years Resolution to address your financial situation and begin on your way to financial success.

I recently read an article that stated 70% of us consider financial issues the number one stressor in our lives.  This is unfortunate because a lot of the time it is a very easy issue to improve upon.  Improving your overall financial situation stretches far beyond just making more money at work, which is a good thing because, usually that is not within our control.  So what can we do since we do not have the power to just earn more money?  Well there are many things that you can do and I have compiled a checklist of the top 7 issues that when addressed can have a dramatic impact on improving your financial health. 

Much like when you hire a personal trainer who knows the most effective exercises to get the best fitness results, how to motivate you properly, and ultimately get you where you want to go physically.  A great financial planner will help you do the same for your financial health.  They will help you develop strategies to give you the most effective ways to reach your financial goals, help motivate you to achieve your most important aspirations, and ultimately get you where you want to go financially.

As always I am available to help you address any one or all of these issues below.  I have been able to help many of the people I work with save time, money, and taxes and help them avoid the common mistakes that most people make with their finances.   Feel free to contact me at 651-647-4935

•1.        Create a Budget.  This is the number one issue that people, including myself struggle with.  The use of credit cards has really hindered our ability to remain responsible with our spending as it never seems as though we are spending actual money.   It seems as though we are making enough money at work, and that we should be able to get ahead, but where does it go? One major problem that people have when creating a conventional budget is everything is looked at in the past. When gathering the information on your purchases it is too late, the money is spent.  I have begun using a cash flow management tool called First Step Cash Management with my clients.  This program allows people to make real-time decisions.  Let me know if you would be interested in finding more about this wonderful program.  One quick tip to help balance your budget a little better:  1) Use cash more.  It is much more difficult to part with cash than it is to charge your credit card.  I find that people decide against the extra drink at the bar or the new coach purse at Nordstrom if they have to fork over cash.   

•2.        Maximize Your Employee Benefits.  It can be very confusing to try and understand which benefits within your employers plan are most appropriate for you.  Between qualified retirement accounts, Flex savings accounts, Health savings accounts, dependent care benefits, stock options, employee stock purchased plans, health care packages, etc, it is very difficult to decide which fit into your financial plan the best.  The 40 page benefit summary does not make it any easier.  Often time’s people do not even realize what benefits they currently have or what is available to them.  Make sure to review your benefit statement or have a professional analyze exactly what is being offered and take advantage of it.  Some employers offer a retirement account matching benefit which means for every dollar you contribute to our retirement account they will match a certain percentage.  Since this is essentially free money it is important to make sure to contribute up to the matching amount if possible.  I read that only 30% of people actually contribute up to their employer’s entire matching amount.  Check to see what percentage your employer is matching and take the free money.

•3.       Pay Fewer Taxes.  Most of us have no problem paying our fair share of taxes to maintain our quality of life, but most of us distain the thought of our tax dollars going toward unnecessary spending and expensive entitlement programs.  As long as there are politicians and special interest groups that place their individual needs over the common good of this country as a whole, there will be wasteful spending.  Once we accept the fact that taxes will always be imposed, you can then logically create a financial strategy to ensure that you are not paying too much in taxes.  Lack of attention to the various ways investments are taxed can be the difference between being able to accomplish your goals and not being able to accomplish your goals.  Unfortunately some of the most popular accumulation vehicles in this country today are fully taxed including bank accounts, certificate of deposits, mutual funds, etc.  All interest, dividends, and capital gains outside of qualified accounts are fully taxable.  There are vehicles available though that do offer people an opportunity to defer income taxes or even eliminate them completely.  Some of these vehicles include qualified accounts (ROTH and Traditional IRA’s, 401k plans, self-employed plans, annuities, municipal bonds just to name a few) .  It is important to research which of these tools fit within your financial plan, or meet with your financial professional to explore the many options.    

•4.       Start Investment Accounts. (Just Get Started!)  No matter what your objective is whether its funding retirement or college education the biggest thing is to just GET STARTED.  It does not matter that you do not have a tremendous amount to contribute initially; the important thing is to get in the habit of saving something even if it is just a small amount every month.  I once heard an analogy of buying your first car that relates to this concept.  All of us remember needing a car when we were young whether it be to get to school, sports, or an after school job.  Just because we could not afford a Porsche (despite how bad we wanted one) didn’t mean that we did not buy anything.   Something is better than nothing, thus we purchased a used Ford Taurus. We might not be able to contribute a large amount to an investment account on a monthly basis, but something is better than nothing and the important thing is just getting started.  One key tip is to make sure to set up an automatic withdrawal from checking account every month.  It is much easier having it pulled out than you having to physically write out a check.

•5.        Determine Which Debt To Carry And Which To Pay Off.  Everybody has heard of good debt vs. bad debt, but what does that really mean?  Generally good debt would be considered debt with an interest rate that is tax deductible and lower than the rate you could achieve on funds invested elsewhere.  For example, let’s say you have a student loan, which is tax deductible at a fixed rate of 4%. Let’s also assume you can achieve between 8-12% in a well diversified portfolio based on long-term historical rates.  In this case it would obviously be wiser to keep the student loan and invest into the portfolio.   However, if you carry a balance on a credit card with a rate of 18% (and not tax deductible) you would most likely want to attack that first.   There are many types of debt including home mortgage, student loan, automobile, credit card, etc and which forms of debt should be kept or paid off should be analyzed closely. 

•6.        Review Your Insurance Coverages.  A lot has changed in the insurance industry over the past 5 years.  If you have not reviewed the amount in premiums you are paying for your insurance you may be costing yourself money.  I recently reviewed a gentleman’s life and disability insurance policies and found that he could save 30% in premiums for the same amount of coverage by switching carriers.  I am an independent agent and have the ability to shop several carriers and find the policy that gets you the most for your money.  Determining whether to buy additional coverage through your employer, invest into a permanent or term policy, length of term or how much coverage to have, and group discounts are all important issues that should be addressed.   In addition, most people have not reviewed their coverage in a long time and find that they are significantly underinsured and are putting themselves and their family at risk in the case of death or disability.  Keep in Mind: Your insurance through your employer is not portable, meaning it is only good while you are employed by them.  Having private policies in place that are in force no matter who your employer might be is a good idea. I am available anytime to review your insurance coverage and help you find the best policies available to you. 

•7.        Allocate Your Assets Within Your Accounts Properly.  It has been proven that 90% of investment performance is based upon asset allocation and diversification.  I ask most people that I meet with how they made their investment selections within their 401k.  The vast majority respond that they simply guess.  The second most popular response is that they copy co-workers holdings.  It is completely understandable that most people are not aware of the correct asset allocation or even the proper individual selections because they do not specialize in investments.  But are you willing to gamble with the money you have worked so hard to accumulate and that you are relying on for your retirement to just guessing?  Some employers are now offering target date funds which allocate your assets within your retirement plan according to your timeframe.  These are a big improvement over guessing and should be utilized.  Target date funds are not perfect however and you should work closely with a financial professional to see what the best decision is for you.

This is simply a checklist of important items that when addressed will help improve your financial situation and not an exhaustive list.  Meeting with a financial professional is advised to pursue any and all of these items.  I offer a complimentary 60 minute meeting to explore possibilities in which I can help people gain better control over their finances.  Give me a call and I would be happy to schedule a time which is convenient for you to get together so that you can be on your way to an improved financial situation.

File OH time. Make sure you file both your income tax return and quarterly estimates before the deadlines. Nothing throws up a red flag and says “audit me” more than consistently filing your returns and quarterlies late. If you can’t file on time, be sure to file an extension. Remember, though, that extensions don’t eliminate interest charges.

Keep good records. One particularly vexing issue for salespeople who use their cars for business is substantiating business mileage with a properly documented mileage log. Few mileage logs are up to IRS standards. The IRS will accept either paper or computer-generated logs, but the IRS tends to view computer logs as less credible. (You can find my version of a paper mileage log, called The Audit Angel, for $19.99 at my Web site, www.bergersontax.com)

Double-check meal and entertainment deductions. Meal and entertainment costs are deductible up to 50 percent if they are ordinary (commonly done) and necessary to your business and are either directly related to the active conduct of your business or directly preceding or following a substantial business discussion on a subject associated with your business. Ordinary and necessary costs are those considered helpful and common practice in your industry. You can entertain business associates in nonbusiness settings such as restaurants, theaters, sporting events, and nightclubs, provided the entertainment directly precedes or follows a business discussion. Business associates would include clients, prospective clients, suppliers, employees, partners, or advisers. You should document where the meeting was held, with whom, and the purpose of the meeting. Keep this information with the receipt.

Classify your workers properly. A top audit trigger is a business-such as a real estate brokerage-that treat workers as independent contractors. Questions are more likely to arise about the employment status of office personnel or assistants working for salespeople. If the IRS rules that these workers are employees, you could owe employment taxes, penalties, and interest. While federal tax law provides a safe harbor that classifies real estate salespeople as independent contractors, unlicensed assistants do not have such protection. One important factor in determining independent contractor status is behavioral control, or to what degree workers control how, where, and when they work. If a worker receives extensive instructions on how work is to be done, it suggests employee status. If a worker receives benefits such as paid leave, health insurance, or a retirement package, this might also indicate employee status. For further details on the distinctions between independent contractors and employees, go to www.irs.gov/business and read Publication 1779.

Review IRS audit guides. Audit technique guides were developed by the IRS to assist its agents in performing examinations. These guides contain examination techniques, industryissues, business practices, industry terminology, and other information to assist examiners in performing audits for particular industries. These guides are available to the public at the IRS Web site so you can obtain them and learn in advance what issues the IRS will examine during an audit.

Get good advice. If you’re not aware of new twists in the country’s constantly changing tax laws, you might cost yourself money. If you have a question regarding possible deductions or how to report income, ask a tax professional or call the IRS directly. The money that you spend for good advice up front can pay you back many times over into the future. Follow these easy steps, and you’ll reduce your chances of an IRS audit. At the very least, you’ll have appropriate backup for your deductions to satisfy even the toughest auditor.

I wanted to make sure that my clients were aware of this opportunity, so if it is appropriate for them, they will be able to take action.  Whether you have heard bits and pieces of this opportunity or it is new to you now, this will help you understand this change.

Under the Tax Increase Prevention and Reconciliation Act , (TIPRA), all taxpayers will be able to convert all or some of their traditional IRAs or old 401ks into Roth IRAs, regardless of income.  This will allow people to convert accounts that will be taxable upon distribution down the road (conceivably when tax rates are higher) to accounts that will be taxable now, but then will grow tax deferred and will be completely tax free down the road when you take distributions. 

There are several reasons why this is such a great opportunity for some people and I have outlined those below.

If you would like to explore this opportunity please contact me anytime at 651-647-4935 to discuss if it is appropriate for you.  Many will be taking advantage of this legislative change and you should definitely consider it as a viable financial planning option to save money on taxes.

•1.    Potentially Higher Tax Rates In The Future

All of those stimulus package initiatives and government bailouts are going to cost money.  As a result, today’s tax rates might be the lowest you’ll see for the rest of your life. The consensus is that we may see taxes rise significantly - but no one knows how much.

If you are considering converting to a Roth IRA, you should get a move on, especially if you’re victim of a wage cut or layoff and are in the 10% or 15% tax bracket. In a year or two, you may be in a higher tax bracket because of a new job or salary increase, so it’s best to take advantage of the low tax rates now.

•2.     Ability to spread the conversion tax hit over two years.

Another new perk coming next year: deferred taxes.  Those who convert to a Roth IRA in 2010 can spread their tax liability out across 2011 and 2012, thereby reducing some of the immediate tax hit. They’ll pay half the income they convert in 2011 and the other half in 2012 at whatever tax bracket they’re in during those years.

•3.    Shrinking retirement portfolios

Seeing your traditional IRA or 401(k) shrink by 30% in a year isn’t much to smile about, but if you convert these accounts to a Roth IRA now, you will pay less in taxes.  When you convert part of your IRA or 401(k) balances to a Roth IRA, you pay taxes on the amount being converted.  Because account balances have shrunk, your taxable balance is likely to be considerably lower today than it was when the market was stronger. In effect, this is an opportunity to use the market downturn to your advantage.

     4.    Estate-Planning Benefits

For those concerned about reaching their 80s or 90s with enough cash to leave to their children, the Roth IRA offers some generous estate-planning benefits.

When a traditional IRA or 401(k) is passed on to a beneficiary, the beneficiary has to pay taxes on whatever is left in that nest egg based on their own tax bracket - not the tax bracket of the original account holder. With a Roth IRA, the beneficiary acquires the account without having to pay taxes on the cash that’s left. (The original holder had already paid taxes on the contributions.)

The Roth IRA also doesn’t require minimum withdrawals, so you could leave the entire nest egg untouched for a beneficiary. Typically, traditional IRAs require minimum withdrawals by age 70 1/2.

Jeff Bergerson, Financial & Tax Advisor

1452 Concordia Avenue

St. Paul, MN 55104

651-647-4935

If you have changed jobs, you might still have retirement accounts from your previous employers.  According to the Department of Labor, Americans move to a new employer once every four years and our collective trail of old 401k and 403b plans totals in the trillions of dollars.

While leaving your retirement account with your previous employer is a better decision then cashing it out to splurge on that little sports car you have always wanted, it is better to roll your old 401k or 403b plan into an individual retirement account (IRA) and here are the reasons why.

1.  Fees.  As with any investment there is some sort of cost of the investment itself.  However with employer-based plans those fees are often hidden so that you do not know how much in fees are actually being taken from your hard earned savings.  It is very difficult to track those fees, which are often higher than the fees if you held your funds in an IRA.

2.  Increased Options.  As you know, employer based plans are very limited in the investment options.  Often times you are limited to a dozen mutual funds or less out of the millions that are available out there. In an IRA you can invest in any mutual fund available, stocks, bonds, annuities, and even non-traditional options like real estate and venture capital. Nobody’s situation is the same and thus investment strategies vary tremendously so you should not be limited to a handful of options to try and accomplish your goals.

3.  Expert Advice.  How do you determine which mutual funds you invest in within your 401k?  Talk to your colleagues, follow a chart based on your age, or do what most people do and guess.  Shouldn’t the money you work hard to accumulate and that you will rely on to live in retirement be handled with more care than drawing straws?  Absolutely.  The choices you make with the asset allocations of your investments determine over 90% of your overall investment success.  An IRA can be managed by a financial advisor who knows your goals and objectives and can help make investment decisions based on all the important factors involved.  Although I will mention that if you are currently at an employer and rolling over funds is not an option, I do have the ability to assist you with your asset allocations within your plan as part of the financial planning services I offer.

4.  Greater Access.  If your former employer decided to change 401k providers, your plan assets will be temporarily unavailable to you due to a “blackout” period that occurs as funds are transferred from one plan provider to another.  That time frame can stretch from a few days to a few months.  You can always tap your IRA for retirement after 59 1/2 or before if it is used for a first time home or college expenses penalty free.

5.  Easy record keeping and organization.  Rather than having several accounts floating around, an IRA will help consolidate all of those accounts so that you have all of your investments in one place and can easily monitor them.

6.  Ability to convert to a ROTH IRA.  With the restrictions being suspended in 2010 allowing people to convert IRA’s into ROTH IRA’s and diversify the tax burden upon distribution, it makes the IRA more valuable than holding funds in a previous employers plan.

7.  Flexible Estate Planning.  IRA’s also offer more freedom as well as the potential for tax savings, in the estate-planning department.  If you want to name multiple beneficiaries or a charitable organization as your beneficiary it is best done with an IRA.  Most employer based plans do not accommodate sophisticated beneficiary designations.

If you would like to rollover funds from a previous employer plan, let me know and I can help set up an IRA for you.  If you know of anybody who has recently been laid off or has changed jobs, forward this email to them as it will be very helpful to them.  I can be reached at 651-647-4935 or at  jeff.bergerson@northstarfinancial.com.

The first Time Homebuyer credit, making work pay credit, social security recipient tax credit, and more.

Over the past several months there has been much talk about what the new stimulus package includes and how it will affect all of us.  I have heard so many misinterpretations and confusion surrounding these new laws that I wanted to make sure my clients were well-informed.  Below are summaries of some of the major parts of the new stimulus package that could possibly benefit you. 

First-Time Homebuyer Credit- The new law increases the maximum fist-time homebuyer credit to $8,000 and generally eliminates having to pay the credit back (in 2008 the credit was $7,500 and must be paid back). A first time homebuyer is defined as you (and your spouse, if married) have not owned a home in the three years prior to a purchase. Generally, there is no requirement to pay back the credit for a principal residence purchased in 2009. The obligation to repay the credit on a home purchased in 2009 arises only if the home ceases to be your principal residence within 36 months from the date of purchase. The full amount of the credit received becomes due on the return for the year the home ceased being your principal residence. This credit is available for homes purchased after 2008 and before December 1, 2009.  The credit can be claimed in either of two ways: 

1. Amend your 2008 tax return now and receive your up to $8,000 credit immediately.  I am available to file amended returns and you can contact me anytime at 651-647-4935.

2. Claim the credit next year on your 2009 tax return.

Making Work Pay Tax Credit- This credit is 6.2% of earned income, up to a maximum credit of $800 for married couples filing jointly and $400 for others.  The credit effectively offsets the 6.2% Social Security tax on the first $6,452 of earnings for a single worker, or the first $12,904 of earnings for joint filers. However the credit is phased out by 2% of modified adjusted gross income exceeding $75,000 or $150,000 on a joint return.  For employees the credit will generally be implemented through reduced income tax withholdings.  The IRS has released new withholding tables incorporating the credit that will result in higher take home pay.  Self-employed individuals can claim the credit when they file for 2009.  It is possible that some employees may not receive the full credit to which they are entitled because they have little or no withholdings.  Presumably, adjustments will be required on the 2009 tax return to reconcile the amount received during the year with the maximum credit allowed.

$250 payment to social security recipients and government retirees- A $250 check or electronic deposit will be paid within the next 4 months to recipients of social security, railroad retirement, or veterans disability benefits.  If such persons have earnings, the $250 payment reduces the Making Work Pay credit that would otherwise be available. Government retirees whose earnings were not covered by social security and who do not receive the $250 check will be entitled to a $250 credit when they file their 2009 return.

Home Energy Credits- They are back!  After a hiatus in 2008 the new law raises the energy credit for improvements to a residence to 30% and increases the maximum dollar cap to $1,500.  This covers expenditures for insulation materials, exterior windows (including skylights), exterior doors, central air conditioners, natural gas, propane, and oil water heaters or furnaces, hot water boilers, electric heat pump water heaters, certain metal roofs, stoves, and advanced main air circulating fans.  These are effective for purchases/installations after 2008 and before 2011.

New car-buyer deduction-  If you buy a new vehicle this year you may be entitled to a deduction for the sales tax attributable to the first $49,500 of the purchase price.  The deduction phases out if adjusted gross income exceeds $125,000 for single filers and $250,000 for joint filers.  This new deduction is only available for purchases between Feb 17 and Dec 31, 2009.  The list of eligible vehicles includes cars, motorcycles, light trucks, and SUV’s as long as you are the original buyer and the vehicle doesn’t weigh more than 8,500 pounds.

Please contact me anytime with questions on how to improve your financial and tax situation.  651-647-4935

The answers to the questions you have always had about your personal finances.

We will frequently address a personal finance, tax, or investment topic that personally affects you and your overall financial well-being.  These articles will be laid out in a way that everybody can understand and apply to their own real life finances.  We at Bergerson Tax Services, Inc can help you with all of your personal finance and tax related needs. Please fell free to contact us anytime. This month’s topic is

Should I Pay off My Debt Or Should I Invest For My Retirement?

By Jeff Bergerson, Bergerson Tax Services, Inc

In a perfect world you would be able to pay off all of your debt and also invest for your retirement.  Unfortunately, like most of us you probably do not have enough money to pay off all of your debt and invest for your retirement at the same time.  So what is the most financially savvy strategy to help you pay off your debt and fully fund a retirement account? Should you pay off all your debt before contributing to a retirement account; or should you keep certain debt and contribute to your retirement account.  In this article I will address the different types of debt that you might have, which debt is the best and worst to keep, and walk you through an illustration.

First of all, lets address the type of debt that you might currently have: Home mortgage, student loan, car loan, and credit card debt.  As I wrote in January’s article, To Pay Off My Home or Not to Pay of My Home, That is the Question, a home mortgage can be considered reasonably good debt to maintain.  Interest rates on home mortgages are generally lower than car loans or credit cards, plus the interest you pay is tax deductible. For example, if you have a interest rate of 6% on your mortgage and are in the 35% tax bracket, the after tax cost of your loan is only 3.9%.  Student loan interest is very similar in that the interest rates are reasonably low and the interest is tax deductible.  Up to $2,500 of student loan interest is deductible as long as your modified adjusted gross income is below $70,000 for single filers and under $140,000 for married filers. 

Car loans are a different story; depending on the terms of your car loan your interest rate may or may not be as low as your home mortgage or your student loan, but the interest you pay on it is not tax deductible.  Finally, the worst kind of debt that you can have is credit card debt.  The national average interest rate on credit cards is a staggering 15%, plus the interest you pay is not tax deductible.

When determining what debt to pay off first, it is clear that credit card debt and possibly car loans need to be paid off before your home mortgage and any student loans. The question of whether to even try to pay off your home mortgage or keep it is answered in January’s issue, To Pay Off My Home or Not to Pay of My Home, that is the Question.

It has been determined that credit card debt is the first debt that you should attempt to pay off, but what about investing for retirement? Should you pay off your credit card first, and then save for retirement, or should you just pay the minimum on your credit card and invest the rest into your retirement account?

Lets look at an example to help you decide.

Lets say you have a $5,000 credit card balance of which the interest rate is 14%.  At the same time your employer has a 401K plan and offers a 50% match (50 cents per every dollar you contribute) up to 6% of your salary.  At first glance it looks like a no-brainer, 50% vs.14% returns.  But consider the fact that the 50% match is a one-time gift while the 14% compounds yearly and eventually will overtake the 50%.  Now lets say you have $250 every month of which you have to pay your minimum credit card payment of $125, so you have $125 to either put toward the balance of your credit card or invest in your 401K. 

Example 1.  You pay just the minimum of $125 and invest the $125 (which is actually $174 because it will be contributed pre-tax) every month.  You will need 55 months to wipe out your credit card debt.  During that time if you earn 8% in your 401K and receive a 50% match you will accumulate $17,271 in your 401K.

Example 2.  You choose to put the entire $250 toward your credit card debt and hold off entirely on contributing to your 401K.  You will pay off your credit card in 23 months.  At that point you can begin contributing all $250 to your 401K.  By the end of 55 months you would have $18,515 in your 401K plan.

By focusing on paying off your credit card completely and then funding your 401K rather than splitting your money between the two you will have $18,515 rather than $17,271 over that 55- month period. You can see that paying off your credit card completely before funding your retirement plan is a more effective strategy. 

There are a couple caveats to the idea that paying off your credit card will produce more money in your pocket overall.  First, if you just have a small amount of credit card debt and would be able to pay off that debt in under a year’s time, go ahead and fund your retirement account and take advantage of that employer match.  In instances where you do not have any credit card debt I would always advise to contribute the maximum amount to your 401K up to your company match, its free money!  The other time where I would advise to contribute to your retirement account before paying off your credit card debt completely is if you do not contribute to your 401K at first it meant you never ended up doing it.  In this case I would say start contributing and get the ball rolling and then pay off your credit card.

Ideally the best financial strategy for most people who have credit card debt is to focus on paying off your entire credit card balance first before you begin investing into your retirement account. Once you pay off your credit card balance, begin investing into your retirement account.

Now that we have determined paying off your entire credit card balance is the most financially savvy strategy, I will give you a couple of strategies to help you pay off your credit card debt in the most effective way. 

If you have more than one credit card and cannot pay them all off, the best bet is to try to consolidate all of your cards into the one that offers the lowest rate.  Most credit card companies make offers of lower interest rates, called balance transfer credit cards, in an attempt to attract you to consolidate your debt with their company.  Be careful, as sometimes there is small print that can boost up your rate after a certain period of time.  Read all the small print and research the credit cards thoroughly before making your decision where to transfer your debt.

If you own a home and have built up equity, it would be a good idea to take out a home equity loan to pay off your credit card debt.  You will get a much better interest rate and the interest you pay on a home equity loan is tax deductible.  Whichever route you choose the most important thing to do is pay off your credit card and the sooner you begin, the better.

Jeff Bergerson founded Bergerson Tax Services, Inc (BTS) eight years ago and pilots a rapidly growing practice in St. Paul, Minnesota. Jeff has written many articles offering tax related strategies, financial strategies, and business guidance. Bergerson Tax Services, Inc. provides individuals and small business tax preparation services, small business consulting, and tax planning.  He can be reached on the web at http://www.bergersontax.com/ or by email at info@bergersontax.com. 

The first thing I like to ask people is whether they go to a medical professional to diagnose what affects their health? Or whether they would go to court without a law- professional representing them?  Personally I do not, because I believe in specialization.  I want a professional carpenter putting on the addition to my house, an electrician to do the wiring, and a mechanic to work on my car.  These people do this everyday, have had extensive training and know what they are doing. This is why I cannot imagine individuals attempting to do something they do once a year and that has such a large financial impact on their lives, like preparing their tax return.

I have witnessed so many cases in which people have either caused an audit because what they have included on their return or have cost themselves thousands of dollars by missing credits or deductions that they were eligible for.  I currently have many clients who at one-time prepared their own returns and would never do it again because they now see the benefits of having a professional tax preparer.

What is the thing that we never have enough of and that we can never get back once it is gone?  Yes, time.  Recent government estimates show it takes taxpayers 28 hours and 30 minutes to complete an average tax return with schedules A and B.  Don’t you have better things to do with your time?  My clients put all of the information they receive in a folder and bring it into me to complete their tax return.  On average my clients come in, meet with me, and have their returns filed electronically in under an hour. That is quite a savings in time.

Another reason to hire a tax professional is that you do not keep up with current tax law.  Congress is constantly passing new laws, the IRS comes out with new rulings, and judges make new decisions all the time, all which directly affect your tax situation. How many of you not only read about all these decisions in the newspaper, but research them thoroughly to see how they affect your individual tax situation?Professional tax preparers subscribe to newsletters, press releases, and alert services that keep them abreast of every changing tax law.  In addition, professional tax preparers attend tax education courses throughout the year and learn from experts, IRS agents, and state officials.

One of the best commercials I have seen is where the husband gets into a little tax trouble and asks his wife what he should do.  He obviously had used a do-it-yourself tax software, so she told him to ask the box.  This is so true.  I receive telephone calls throughout the year from clients who have received letters from the IRS and do not know what to do, have tax planning questions, or simply have to make a decision in their life and want to know how it will affect their taxes.  I just wonder where people who prepare their own taxes go for that type of information.  Like with all high quality tax preparers I am available year round to help clients out with any tax questions or concerns that they might have.  Keep in mind if you make an important decision in your life, chances are it will affect your taxes.

Finally, by using a high quality tax preparer you are actually lowering your chances of an audit. Tax professionals know the thresholds at which deductions throw up red flags. By informing you that your charitable deductions are extremely high, you might be able to eliminate an audit of your entire return.  Statistics are available that track average taxpayers deduction amounts and tax preparers know this information and can tell you when your deductions are greatly exceeding these averages.  I have made these itemized deduction averages available in The Audit Angel:  Your Essential Income Tax Organizer and Mileage Log, which you can order at http://www.bergersontax.com/.  If you prepare your own taxes you won’t know if your deductions are raising a red flag and you might either take less deductions than you could or take way too many deductions and draw attention to your return.

I urge anybody that I speak with to hire a high-quality tax professional to complete their tax returns.  I have personally been in the income tax industry for over ten years and provide my clients with personalized and expert income tax service.  I am available year round to help with any tax related matter.  You can reach me at 651-647-4935, email-info@bergersontax.com, or on my website at http://www.bergersontax.com/. If you have any questions about my services or any other tax related matter, or would like to set up an appointment for this coming tax season please call me anytime.

The answers to the questions you have always had about your personal finances.

Throughout the year we will address a personal finance, tax, or investment topic that personally affects you and your overall financial well-being. These articles will be laid out in a way that everybody can understand and apply to their own real life finances.  We at Bergerson Tax Services, Inc can help you with all of your personal finance and tax related needs. Please fell free to contact us anytime.  This month’s topic is

To pay off my home, or not to pay off my home, that is the question.

By Jeff Bergerson, Bergerson Tax Services, Inc

This question is asked more than any other personal finance question.  You have probably heard a million different theories from a million different people.  But what is the right answer?  The simple truth is it depends upon your situation.  This article will clearly lay out all of the factors to help you decide which would be best for you.

Your home is one of the biggest investment decisions you will ever make.  Deciding to keep a mortgage or pay it off could affect your whole financial life and might mean earning or costing yourself hundreds of thousands of dollars. 

With extra money should you put it toward your mortgage or invest the money?  Or, if you had enough money to pay off your mortgage should you?

There are several factors that need to be considered:

1. Your time until retirement.
2. Your mortgage rate.
3. The rate of return you can achieve on your money invested rather than being put into your mortgage.
4. Your psychological capabilities and your self-disciple.

To start lets take a look at a real life example and assume the following:  You have just inherited $250,000 that you can use to either pay off your home or invest into an investment account. You have just purchased a house with a 6% 30-year mortgage with a balance of $250,000 and you are in the 25% tax bracket. 

Interest on your $250,000 mortgage is $15,000 of which you can deduct $3,750 on your taxes because your taxable income goes down $15,000 (your mortgage interest paid deduction).  Your after tax interest cost therefore is $11,250.

Lets say you use the $250,000 to pay off your mortgage.  You no longer have any debt and have saved $11,250 after taxes.  In comparison if you keep the mortgage and invest your $250,000, the rate of return (the 3^rd factor needed to consider) will be dependent on the type of investment you choose to put your money into and the amount of risk involved.  Historically a portfolio consisting of 80% stocks and 20% bonds has returned between 8-10%.  Lets assume an 8% return; you would gain $20,000 in the first year. You have to factor in taxes on that gain and the long-term capital gains and dividend rate is currently at a maximum 15%.  If you sold the investments after one year, that would leave you with after tax gains of $17,000.  We will use a taxable investment account for our purposes, but if you are able to invest your money in a tax deferred account such as a 401K, IRA, SEP, etc, your returns will be even greater.  By comparing what you save ($11,250) and what you would have earned had you invested the money ($17,000) you can see the difference for you is $5,750.

What makes this example even more powerful is when you factor in the power of compound interest over time on the money you invest.  Borrowing money at simple interest (as with your mortgage at 6%) and locking in the amount owed at today’s value can never balance with investing your present dollars to receive compounding returns for up to 30 years into the future.  The invested side of your balance sheet pulls ahead and leaves the debt side far behind.  Even if the interest rate paid on your mortgage and the interest rate received from your investment account are equal you are going to come out better financially with the investment.

To demonstrate the power of compounding, follow the example below:

There are two women, age 30, who both inherited $250,000 and they both decide to buy new homes priced at $250,000.  Both woman have full time jobs and have a steady salary.  The first woman, Priscilla Payoff has always been told that paying off your mortgage is the best solution so she did just that and paid cash for her home and does not have a mortgage.  She uses her salary to buy luxuries like an SUV and speedboat.

The next woman, Samantha Savvy has been talking with her financial and tax advisors and decides to invest her money rather than paying off her mortgage immediately.  Samantha put $50,000 down on the house and invested $200,000 in an investment account. Samantha uses her salary to make her interest only payments and lets her investment account appreciate in value.  At the time of purchase:

Now that you can see the power of compounding and the power of investing money as opposed to paying off your mortgage, you will probably conclude that the no-brainer choice is to maintain a mortgage and invest your money.  I would like to touch up on a couple of factors that I mentioned earlier that may argue for paying off your mortgage.  Factor #1, Your time until retirement. If you are approaching retirement (5-10 years) you will most likely not be able to invest your money where you can achieve 8-10% Typically 8-10% gains come from stocks, which should not be the majority of your portfolio if the money will be needed in the short run.  The types of investments more reasonable for individuals near retirement would usually only yield between 4-5% (treasury bonds, money market, etc) making the strategy not as effective.  Also in the short run the power of compounding interest is not nearly as powerful as if you have a thirty-year time frame.

As for Factor #2 your mortgage rate and Factor #3 the rate of return on your investment account, if your rate of return that you achieve on your investment account is significantly lower than the rate you pay on your mortgage, this strategy will not be successful.

The other factor is Factor #4, which are your psychological capabilities and your self- discipline.  If you cannot sleep at night and you are completely stressed out by the idea of having your money invested in the stock market and more specifically in the types of investments needed to yield 8-10% you should not be in it.  If you cannot tolerate the sometimes-large fluctuations that the stock market sometimes produces go ahead and put your money into your house. If you constantly worry about debt on your house or think not having a monthly mortgage bill is your personal heaven, then pay off your mortgage.

Do consider a couple of additional things. Over time the stock market has proven to produce positive gains near 8-10%, but you need to wait out the bad times and just let the market work for you.  Next consider that home equity is relatively illiquid meaning if you suddenly need money for unforeseen circumstances and emergencies it is easier to sell a mutual fund in your investment account than it is to pull cash out of your home.

That leads me to my final point.  It is absolutely essential that if you choose to not pay off your mortgage and go the route of investing that money, you must, must, must actually invest it.  If you do not have the self-discipline to invest every penny and think your desire to buy a new S.U.V or luxury boat will be to great than you need to put your money into your home.

In summary, if you have a long-term time frame (over ten years) until retirement and you have the psychological capabilities and disciple to invest all of the money that would have gone into your home and your rate of return on your investment account is equal to or greater than your mortgage rate, you will be better off investing your money than paying off your mortgage. You will need that long-term time frame to absorb the market fluctuations and achieve the time tested market yield of 8-10%.  So take all of the previous information, factors, and illustrations and apply them to your situation and decide which avenue is best for you.

Jeff Bergerson founded Bergerson Tax Services, Inc (BTS) eight years ago and pilots a rapidly growing practice in St. Paul, Minnesota. Jeff has written many articles offering tax related strategies, financial strategies, and business guidance. Bergerson Tax Services, Inc. provides individuals and small business tax preparation services, small business consulting, and tax planning. He can be reached on the web at http://www.bergersontax.com/ or by email at info@bergersontax.com. 

If you use the married filing seperatly filing status, the parent with the larger amount of taxable income is responsible for the kiddie tax computation. If parents are divorced or separated, the parent who has custody of the child for the greater part of the year computes the tax.

Attention: Starting in 2008, the kiddie tax will apply to investment income of over $1,800 for children in the following categories:

1.  children under the age of 18.

2. children who are age 18 who do not have earned income exceeding 50% of their support.

3. children age 19-23 who are full-time students and who do not have earned income exceeding 50% of their support.