Reasons to Buy a Home (Besides the Expiring Tax Credit)
Even though the home buyer tax credit ends on April 30, 2010, there are many different ways you can gain tax benefits from a home purchase or refinancing a mortgage.
Current Home Buying Savings Besides the Tax Credit
After the home buyer tax credit expires, you can still save money on purchasing and owning a home.
Mortgage rates are at an all time low and even though experts predict they will increase slightly starting this month, it won't be drastic. Mortgage rates aren't expected to reach over 6 percent by December 2010, so there is plenty of time to lock in a lower mortgage rate now. Along with that, the current low home prices can help you find your dream home that fits your budget and even produce a profit if you decide to sell in the future.
The Benefits of Home Ownership
Appreciation: Your home's value will increase at the rate of inflation with the addition of 1 or 2 percentage points. So when you decide to sell someday, you will likely receive a positive return on it.
Equity: As your home appreciates, you acquire equity. You can use this savings to pay for home improvements or use it for other financial obligations.
Investment: Buying a home is one of the best investments you can make. If you buy at the right price (as opposed to some who purchased over-priced properties and now find themselves under-water with their mortgage) your home should appreciate over time. You are investing money into something that will give you more than you put in.
Stability: Your mortgage loan payment will not change if you choose a fixed rate mortgage (not including property taxes or homeowner's insurance). Even if you choose a variable rate mortgage, you will still have a cap so you can calculate the most you will have to pay over time.
Tax deductions: You can deduct many home expenses on your taxes such as mortgage interest, property tax and closing costs.
Home Equity deduction: Interest paid on a home equity loan is also deductible provided it does not exceed $100,000 in a year. In addition, your deduction may be limited if your combined first and second mortgage loans exceed the property value.
As you can see, there are many ways a homeowner can benefit from the Federal tax code. Note that most of these deductions are only available to taxpayers who itemize their taxes. In addition, your tax credits and deductions begin to phase out at higher income levels.
Combining these benefits makes home ownership even more attractive than it already is. As with any tax related items, you should check with your tax advisor to find out how to maximize home ownership tax reduction strategies.
With the recovering housing market, this is one of the best times to buy and own a home.
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Tax Breaks That'll Help in 2010
If you're dreading the big check you'll have to write on April 15th – it might cheer you up a bit to look forward to some new tax breaks for 2010. The IRS generally introduces tax changes as the year progresses, but some new tax breaks that have already been announced can help lower your tax bill this year.
Homebuyer Credit
There are new developments here on several fronts. First, the existing tax break for first-time homebuyers is running out but you can still take advantage of this credit of up to $8,000 if you buy before April 30, 2010 and have your closing before June 30, 2010. But the program was expanded to include current homeowners who want to replace their primary residence. These homebuyers can get a credit of up to $6,500. Be warned: the IRS will be cracking down and making sure current/former homeowners who take this credit actually meet the eligibility requirements.
Taxpayers who qualify can elect to take this credit on either their 2009 or 2010 returns. Members of the armed forces and certain federal employees based overseas have until 2011 to take advantage of this credit.
Earned Income Tax Credit
The American Recovery and Reinvestment Act included a temporary expansion of the EIC for 2009 and 2010 returns. There's a new category specifically for qualifying taxpayers with three or more children, who can get a credit of up to $5,657. The ARRA also temporarily increased the income limits for EIC eligibility. For the 2009 tax year, the credit gradually begins to phase out at $21,420 for married taxpayers with children, and $12,470 for married couples with no children.
No More Limits on Roth Conversions
The Journal of Accountancy has dubbed 2010 "The Year of the Roth Conversion." Until this year, you could only convert from a traditional IRA to a Roth IRA if you had an Adjusted Gross Income of under $100,000. Roth IRAs offer several advantages: namely, the money accumulates tax-free, and you don't pay taxes when you retire and withdraw the money. In 2010, that limitation disappears, allowing upper-income taxpayers to take advantage of a Roth conversion. In addition, the tax bite can be spread out over two years, giving you more time to pay the tax owed on the converted funds.
New Tax Breaks You Can Still Apply to Your 2009 Return
If you haven't yet filed your 2009 return, there are a few new breaks you can still take advantage of now.
*Haiti Relief Donations: Taxpayers who itemize and donate to Haitian relief organizations between Jan. 11 and March 1 can write this off on their 2009 returns.
*Making Work Pay Credit: Taxpayers with earned income and a modified AGI of under $95,000 ($190,00 for married filing jointly) can get this credit, which is 6.2% of your earned income, up to a maximum of $400 for singles, $800 for joint filers. The credit will be reduced if you received a $250 economic recovery payment in 2009.
*Homebuyer Credit: As mentioned above, if you qualify for this credit, you can choose whether to apply it to your 2009 or 2010 return.
With all of the available tax breaks, it looks like the IRS won't be able to take quite as much from you this year. If you have questions or want to know more ways to make tax breaks work for you, consult a tax professional.
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Credit Score Myths You Need to Know
Every year, many home buyers worry that their credit score is too low for them to qualify for a mortgage. While raising your credit score isn’t rocket science, it’s easy to get confused between the factors that actually impact your credit versus the ones that just sound like they do.
There are minimum credit score guidelines, and the best thing to do is really to just improve your score, which is easier than you think. A higher credit score will also get you a better mortgage rate, so you can save money in the long run.
To help with credit score improvement, and many of the barriers homeowners face when they want to improve their score, here’s a list of some credit score myths you need to know.
1. Paying off my car will raise my credit score . Some homeowners try to refinance right after paying off a large debt, believing that a paid off purchase will make their scores shoot straight up. This is not the case. Your credit report shows a history of your payments, so making the last payment on the loan is not as big of a deal as say, making all the payments on time.
2. I should cancel all my credit cards that are paid off so I’m being responsible and budgeting more effectively. This is one of the most common mistakes. While closing an account does NOT delete that credit history, it can actually hurt your score due to something called “credit utilization.” This is how much credit you use compared to how much credit is available to you. By closing an account, you’re decreasing the denominator – or the amount of credit that’s available to you – which can make it look like you’re using a greater percentage of your credit (if you carry balances). Your credit score can take a hit at certain increments of credit utilization, but generally, if you stay under 50%, you should be okay.
3. I only have one credit score. You actually have a score from each of the three credit bureaus. They are: Equifax, Experian, and TransUnion.
4. Shopping around and getting multiple inquiries will hurt my score. This used to be true, but now credit reporting agencies give you a 30-day span for all your comparisons when you’re shopping for credit cards, so many inquiries within a short amount of time for credit cards will not lower your score.
5. Checking my score will hurt it. The credit reporting bureaus differentiate between hard credit pulls and soft credit pulls. When you check your own score – it’s a soft pull, versus when a credit company checks your score – it’s a hard pull.
6. I don’t really need to check my credit score, my finances are in good shape. Checking your credit score three times a year will help you prevent identity theft. You should always dispute any errors, and keep a close eye on it to maintain that good score.
7. Declaring bankruptcy means a fresh start for my credit. Very wrong! A chapter 7 bankruptcy will stay on your credit report for 10 years, with a huge impact after the filing date.
8. I need to pay someone to fight my credit. It’s easy to dispute credit report errors, so before you hire someone check out free online tools like the one Quizzle offers to see if you actually need the manpower.
9. Credit Reports take 6 months to update. This is not true because many creditors and lenders report to the bureaus once per month. Different bureaus update their database at different rates, and in some cases, it’s as soon as the occurrence is reported.
10. I got married, so our credit scores are merged. Consumer credit scores may not be merged when one gets married, but in the case of a mortgage, a joint credit report is pulled for a married couple and the credit score is derived from those joint reports.
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