RECENT TAX LAW CHANGES
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
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.
BACK INTO YOUR BUDGET
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
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
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
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.
Tax and Financial Planning Calendar for September, 2005
Saving and Investing
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.