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SEPTEMBER 2005 NEWSLETTER

RECENT TAX LAW CHANGES

by Andrew D. Schwartz, CPA

Just before breaking for summer recess, Congress passed the Energy Tax Incentives Act of 2005.  If you're green, or have green tendencies, some of the provisions of this new law will save you some taxes.

Let's look at some of the new tax breaks available to you because of this recent tax law change.

Hybrid Vehicles:  The $2,000 "Clean-Fuel" deduction is replaced with a more valuable tax credit ranging from $650 to $3,400, depending on the vehicle, for purchases made between 2006 and 2010.

Energy Efficient Home Improvements:  You can now qualify for a tax credit equal to 10% of the money spent on the installation of certain energy efficient improvements to your principal residence including insulation and exterior windows, doors, and skylights.  You can also take a tax credit for "qualified energy property" including up to $50 spent on circulating fans, $150 on furnaces or hot water boilers, and $300 on heat pumps, water heaters, and central air conditioning.  The credit applies for purchases made during 2006 and 2007, and is limited to a lifetime max of $500 per dwelling, with no more than $200 of the credit to be taken for replacement windows.

Energy Efficient Appliances:  The law provides manufacturers with a tax credit ranging from $50 to $200 per unit for each energy efficient dishwasher produced in 2006 and 2007, and for each washing machine and refrigerator produced between 2005 and 2010.  If purchasing an energy efficient appliance is in your plans, make sure the manufacturer passes this tax savings on to you.

Energy Efficient New Home:  Contractors are eligible for a tax credit of up to $2,000 for each new (or significantly rehabilitated) home "substantially completed" and sold during 2006 and 2007, provided the home meets certain energy savings criteria.  If you're in the market for a brand new home, make sure the builder passes this lucrative tax break on to you.

Energy Efficient Commercial Improvements:  If you own a commercial building or condo, you're eligible to claim an immediate deduction of up to $1.80 per square foot (versus depreciating the costs incurred over 39 years) by making major energy saving improvements to your building's lighting, hot water, and HVAC systems during 2006 and 2007.  Upgrading insulation, metal roofs, and exterior doors and windows also counts towards this deduction.

Taxing Tax Breaks

These rules are very specific, and it's not easy to figure out whether you're eligible for a tax break, and if so, how much you can claim.  But for the next few years, taking steps to save the environment could save you some taxes.

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BACK INTO YOUR BUDGET

by Andrew D. Schwartz, CPA

Ask the average person what's easier - putting together a household budget, or sticking to it - and the response you'll get will most likely be a shrug of the shoulders.  Putting together a household budget takes time, and sticking to your budget takes discipline. 

What if you don't have the time or desire to review your actual inflows and outflows each month?  Luckily for you, there's a shortcut available known as "backing into the budget".

Also known as "paying yourself first", financial planner Susan Schwartz tells her clients to skim off the cream and live off the milk.

To back into your budget, start by subtracting your estimated monthly outflows from your net salary and other inflows.  Next, sign up with a bank or mutual fund company to have that amount of money automatically transferred out of your checking account into a savings or money market account each month. 

For example, if you bring home $7,500 per month, and estimate that you need $6,000 to pay all of your bills, you'll want to automatically transfer $1,500 into a savings account each month.

If, at the end of the month, you don't have enough money in your checking account to pay all of your bills, simply transfer some money back from your savings account to cover the shortfall.  Each time you dip into your savings, you'll know that you didn't meet your budget for that month.

Savings Systematically Works

One by-product of backing into your budget is that it forces you to save systematically, providing you with the following advantages:

  • Invest your money earlier.  Each month, money is automatically being transferred into your savings accounts.  There's no reason to wait until the end of the year to put your money to work for you.

  • Dollar cost averaging.  By purchasing a fixed dollar amount of a mutual fund each month, you'll buy some shares when the market is high, some shares when the market is low, but avoid investing all of your money when the market or the fund is as its peak.

Systematic Savings Opportunities

There are plenty of systematic savings programs available to you.  At work, participating in your employer's 401(k) or 403(b) plan forces you to save a set amount of money each month.  For 2006, you can contribute up to $15,000 ($20,000 if 50 or older) into these plans - or $1,250 per month. 

If you're self-employed, you can set up your SEP or Solo 401(k) and automatically transfer money from your checking account into your retirement account on a monthly or quarterly basis.  This year, you can sock away up to $42,000 into these tax-advantaged savings accounts.

Trying to save for a child's college education?  Every company that offers 529 plans and Education Savings Accounts (ESAs) includes sign up forms for automatic transfers as part of the paperwork you need to complete to set up an account.

And if you're fortunate enough to have money left over after saving for retirement and your child's education, systematically investing every month into tax-efficient mutual funds and individual stocks is a great way to build up your nest egg.

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Tax and Financial Planning Calendar for September, 2005

Month

Income Taxes

Saving and Investing

 

September

  • 3rd qtr estimates due 9/15/05

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2004 & 2005 Tax Facts

  • For 2004 the standard deduction for a single individual is $4,850 and for a married couple is $9,700. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
  • For 2004, the personal exemption is $3,100. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  • The maximum earnings subject to social security taxes will be $90,000 for 2005 up from $87,900 in 2004.
  • The standard mileage rate is $.405 per mile for 2005, up from $.375 per mile for 2004. .
  • The maximum annual contribution into a 401(k) plan or a 403(b) plan is $14,000 for 2005.  And if you'll be 50 or older by December 31, 2005, you can contribute an extra $4,000 into your 401(k) or 403(b) account this year.
  • The maximum annual contribution to your IRA is $4,000 for 2005.  And once you turn 50, you can contribute an extra $500 into your IRA this year.  You have until April 15, 2006 to make your 2005 IRA contributions. 


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