tax credit

6 Ways to Put Your 2011 Payroll Tax Break to Work

Darwins Money — Thu, 06 Jan 2011 13:00:10 +0000

With Congress and President Obama having put their stamp of approval on the 2011 tax deal, a major component of the legislation affecting virtually all working Americans is a change to the payroll tax. Historically, employees were subject to a tax of 6.2% of earnings up to a cap, which is $106,800 for 2011. In order to help stimulate the economy and achieve a compromise on tax breaks, this payroll tax has been reduced to 4.2% for 2011, effectively giving everyone a 2% raise on their first $106,800 earned (so a full 2% raise for most of us!). With this new-found bonus for 2011, are you going to just let it melt into your budget and spend it blindly (which is what the government intended) or strategically allocate this money to a specific objective or cause?

Increase Your 401(k) Contribution

This is what I'm doing. I went into my 401(k) account first thing and immediately increased my contribution by 2%. Since we were making do with my take-home pay last year, I figured by automatically directing the extra 2% right to my retirement account, we wouldn't even notice the difference. Who knows, if I get a decent raise this year, maybe I won't even have to back it down again in 2012 when the 2% break expires.

Build Your Emergency Fund

With so few people having a sizable emergency fund for layoffs or life events, it's worth considering shifting some extra funds into a dedicated emergency fund account (for more, see "Figuring the Size of your Emergency Fund").

Pay Down Debt

Allocating an additional 2% monthly to existing high-interest debt may be a better use of your funds than any other options presented, especially if you're talking about credit card debt with an interest rate over 20%.

Give It Back

Many people are frustrated with the constant government giveaways and don't feel they actually deserve or need this tax break. As a result, they're giving the money away. For instance, some professors started a website that allows "the rich" to give back tax deductions in the name of job creation at Give It Back for Jobs. If that's not your fancy, surely there's a local cause or favorite charity where you could direct an equivalent amount from your payroll tax break.

College Savings

With young children, setting aside just a few thousand dollars a year goes a long way in helping to offset the costs of college. Presently, the most popular option is the 529 plan (see this 529 plan article on the benefits of the pre-paid tuition vs. self-directed investment options).

Invest in Your Home with Green Upgrades

Perhaps you've been putting off that new energy-efficient front door or replacing a few windows. Well, part of the 2011 tax deal is also an extension of some portions of the energy tax credit. While the credits aren't as attractive as they were in 2009 and 2010, you can still save a few hundred dollars on an energy upgrade for your home and realize the longer-term benefits of lower costs moving forward.

What are you going to do with your 2% raise?

This article is from Darwins Money of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How Will the Obama Middle Class Tax Credits Benefit You?

Xin Lu — Wed, 27 Jan 2010 14:00:02 +0000

President Obama is announcing several tax credits for the middle class in his State of the Union speech. Here are some of the details on what the proposals are, and how those who qualify can get the most out of the credits.

The Child and Dependent Care Tax Credit will increase from 20% to 35% of qualifying expenses for families making under $85,000 a year. The credit decreases to 20% for families making up to $115,000. Families could claim up to $3,000 in expenses per child for up to two children. This means that a qualified family that claims the max amount of $6,000 in expenses will see a tax deduction of $2,100 instead of $1,200. It also means that for some families it would become more financially prudent to claim the Dependent Care Tax Credit instead of funding a dependent care flexible spending account with the maximum of $5,000. This tax credit is not refundable so those who do not pay taxes will not receive it.

The Saver's Credit will become refundable and expanded. Currently the credit ranges from 10 to 50 percent on the first $2,000 of contributions people make to a 401(k), IRA, or other qualified retirement plan. The maximum credit is $1,000 for an individual and $2,000 for a married couple. The current income limit for receiving this credit is $55,500 for a married couple. The new proposal would allow couples making up to $65,000 a year get a 50% credit on the first $1000 they each contribute for a maximum of $500 of credit per person. Couples making up to $85,000 would get a partial credit. If this credit were made refundable then those who do not make enough to pay taxes will benefit the most when they save at least $1,000 a year since they will be guaranteed a 50% match from the government.

Obama's middle class task force also proposed several other initiatives relating to student loans and automatic IRAs. The final tweaks to the tax code will still need to be approved by Congress and signed into law, but I personally think that these changes are too specific and will not affect a great amount of people significantly. Nevertheless, those who qualify for the tax credits could stand to gain a maximum of a couple of thousand dollars a year.

What do you think? Will you benefit from these tax changes? Will these tax credits save middle class America?

This article is from Xin Lu of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Homebuyer Tax Credit Extended and Expanded

Xin Lu — Sat, 07 Nov 2009 16:00:02 +0000

A couple months ago I wrote about the pros and cons of extending and expanding the popular first time homebuyer tax credit which was due to expire on November 30th, 2009. I wrote that there was a good chance that Congress would extend the credit regardless of the costs. Sure enough, this week Congress has approved an extension and expansion of the credit. Here are some details on the changes.

First of all, the $8000 tax credit will be available to first time homebuyers that enter into contract by April 30th, 2010, and close on the deal by June 30th, 2010. This is essentially a 6 months extension.

Next, the income limits for qualification have been increased from $75,000 to $125,000 for single filers, and $150,000 to $225,000 for joint filers. This increases the number of people eligible for the credit as well as the cost of the program by quite a bit since many people who could afford to buy homes now have high incomes.

Finally, there is an expansion of the credit for move up buyers. Basically, those who have owned their current homes for at least five years could buy a new home and get a $6500 credit. The new home purchased must cost $800,000 or under. The start date for this new credit will be November 6th, 2009, when President Obama signed it into law.

This credit extension was attached to a larger bill that is extending unemployment benefits by 14 weeks to 20 weeks, and it passed with very few dissenters. The new extension is projected to cost 10.8 billion in lost taxes, but if it works out like the Cash for Clunkers program or the first part of the tax credit then it will probably cost quite a bit more.

In my last post some commenters wrote that they would be very angry if late comers were given a better deal on the tax credit. Some people I know are also feeling gypped that they did not qualify for the tax credit this year due to the lower income limit. What do you think? Is the tax credit extension really necessary now? Would you take advantage of the new extension?

This article is from Xin Lu of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

$8000 housing tax credit can now be turned into cash at closing according to FHA

Xin Lu — Wed, 10 Jun 2009 04:38:28 +0000

As part of the Obama stimulus plan passed in January, first time home buyers in 2009 are entitled to a tax credit of up to $8000 that they do not have to repay. This tax credit was supposed to be given to the taxpayer after they file their 2009 taxes in 2010, but it seems that a new set of FHA guidelines is allowing many to take the money during closing. Here are some of the details.

First, to qualify for this tax credit you must not have owned a principal residence during the previous three years. However, if you own a second home or rental it is okay. Your household income also cannot exceed $95,000 for singles and $170,000 for married couples filing jointly. You also have to close on your new home by November 30th, 2009.

The FHA's new "tax credit monetization" program allows many state housing finance agencies to provide second mortgages in the amount of the tax credit so that the borrowers can use the money towards the required 3.5% downpayment for FHA loans. These second mortgages are usually low interest and have very short terms.
To check if your state's housing finance agency is participating in this monetization you can go to this website and then contact your local agency if there is a program you qualify for. Essentially this is a form of downpayment assistance by the state government. You do have to pay the money back to your state based on the terms of the second mortgage.

If your state's housing finance agency is not participating in the monetization program it is still possible for an FHA approved lender to give you a cash advance towards your tax credit. However, this cash advance cannot be used towards the 3.5% FHA downpayment requirement, but you can use the money to add to the downpayment, buy down interest, or pay any other type of settlement fees. The lenders will charge a fee for advancing you the money, but the FHA is limiting the fee to 2.5% of the tax credit. This means that the most a borrower would pay for the entire $8000 advance is $200.

I think this program could be very advantageous to people who can responsibly afford a home's monthly payments, but just do not have enough money saved up and cannot possibly save up $8000 in the next 5 months. This especially makes sense in areas where home prices are not very high and a mortgage would cost less than rent after accounting for the "free" $8000. In markets like the Bay Area or Manhattan where $8000 would barely make a dent in the price of the home it makes less sense to take a loan against the tax credit. Additionally, in rapidly declining markets like Florida and Nevada a home might be worth a lot less in a few months anyway so there is no hurry to buy.

Are you taking advantage of the credit? Why or why not? Do you think the government is irresponsible in doling out this credit?

This article is from Xin Lu of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: