| Home Page
Mortgage News You Can Use
Investment Costs Can Mean Tax Breaks
When Hammering Out Tax Bill, Tax Payers Can Take Advantage of Tax Breaks on the Costs of Investing
The Associated Press
NEW YORK Jan. 5 — As you hammer out your tax bill this year, be sure to take advantage of tax breaks on the costs of investing.
Investing can be a pricey endeavor, requiring you to shell out money for everything from initial sales commissions to yearly management fees. Fortunately, the government provides a few loopholes that let taxpayers retrieve some of their investment costs through their yearly tax returns. Tax-savvy people can use these tricks to regain money on everything from the gas guzzled to visit their brokers to the interest paid to invest on margin (loans provided by brokerage houses).
But beware: Uncle Sam this year dramatically reduced the tax benefit of investing on margin. People who are accustomed to taking a tax deduction for investing with borrowed money will likely find it significantly less beneficial than ever before.
Yet, taxpayers appear to be totally unaware of this change in the tax law, said Jeffrey Kelson, Northeast regional tax director with tax firm BDO Seidman in New York City. Indeed, margin debt rose 25 percent in July even though tax law changes make this strategy more expensive than ever, according to data from the National Association of Securities Dealers.
"I think a lot of taxpayers will be surprised in April," said Kelson.
The first type of write-off that can help you reduce your investment costs is known as the miscellaneous itemized deduction. The name is fitting because it consists of tax breaks for seemingly random expenses.
For example, you may use this strategy to recover the cost of professional investment advice or to get money back on accounting and legal fees caused by your investment activities. You might even be able to get a tax break on the cost of subscriptions to publications that help you invest.
Don't try to guess what expenses qualify for this write-off. The items that fall under this provision are truly miscellaneous, so it's best to check with the Internal Revenue Service first. For example, taxpayers can deduct transportation costs to visit their investment adviser's office, but not to travel to and from shareholder meetings.
As with all things tax-related, you have to meet certain criteria to take full advantage of this loophole. Miscellaneous items are deductible only if they total more than 2 percent of your adjusted gross income, or AGI. If they do, you can deduct anything in excess of that 2 percent.
So say your AGI is $75,000 and you have accrued $4,000 in miscellaneous expenses in 2003. Because 2 percent of $75,000 equals $1,500, you would qualify to take the deduction for the remaining amount, or $2,500.
If your miscellaneous items this year don't exceed 2 percent of your AGI, you can't benefit from this deduction.
If you used margin to invest this year, you may be entitled to deduct the cost of the interest you paid on the loan. The basic rule for this deduction says that the amount you deduct cannot exceed interest and dividend income from investments for the year. So if you earned $8,000 in bond interest and stock dividends this year, you can deduct $8,000 worth of margin interest from your tax return in April.
Under new rules implemented this year, you can still use stock dividends to offset your margin interest, but you will pay more to do it.
Here's how the new rules work: If you use your dividend earnings to increase your margin interest deduction, you won't be allowed to benefit from the reduced dividend tax rate of 15 percent. Rather, you will have to pay ordinary income taxes on those dividends, a rate that can be as high as 35 percent this year.
The new law essentially makes people choose between two different tax breaks using their dividends to offset their margin interest and taking the lower dividend tax rate of 15 percent.
For most people, it no longer pays to use dividends to get a margin interest deduction, said Joseph R. Bodan, a tax partner with O'Connor Davies Munns & Dobbins in New York. "I've run the calculations and this usually never makes sense," he said. In the majority of situations, taxpayers will save more by forgoing the investment interest deduction and paying the reduced 15 percent dividend tax rate, he added.
This means fewer people will benefit from a tax deduction for investing on margin this year, and those who do will see their deduction amounts reduced significantly, tax professionals said.
Like Kelson, Bodan worries that investors aren't aware of this change, and that they'll be taken aback in April, especially since investors have been increasing their margin accounts this year. With all the changes in the tax package, this little provision has been left largely ignored, he added.
Bush Budget Has Tax Incentives for Saving
Bush Budget Plan Asks for Tax Incentives to Encourage Saving and Retirement Planning
The Associated Press
WASHINGTON Feb. 2 — President Bush asked lawmakers to secure the tax agenda of his first three years in office and stop tax reductions for workers, married couples, parents and students from evaporating at the end of the decade.
In the 2005 budget, formally delivered to Congress on Monday, the president asked for few new tax cuts. Instead, he urged lawmakers to cement already enacted tax reductions, reconsider his ideas for encouraging saving and finish a long list of pending tax bills.
"There's a lot of unfinished business assembled here," said Lindy Paull, former head of the congressional Joint Committee on Taxation, now a partner at PricewaterhouseCoopers.
All the tax changes taken together would cost $1.1 trillion through 2014. It includes tax breaks for individuals buying health insurance and long-term care insurance, teachers buying classroom supplies, workers who telecommute from their homes.
The most costly proposal asks lawmakers to stop recent tax cuts from expiring in 2010, an item that absorbs nearly 85 percent of the cost for all changes at $936 billion.
Another major change, proposed in a similar form last year, would allow individuals to save as much as $5,000 every year in each of two tax-free investment accounts, one dedicated to retirement and the other without restrictions. A working, married couple could save as much as $20,000 in the accounts each year.
"We'd like to see as many advertisements for lifetime savings accounts as we do for lipstick and light beer," said Assistant Treasury Secretary Pamela Olson.
The two accounts are part of a general effort to simplify rules for savings accounts and credits. Bush would also consolidate a myriad of retirement accounts offered by employers into one. A variety of credits and deductions for education accounts would be reduced to two. Rules used by parents to figure child tax credits and deductions would be streamlined.
To further encourage savings, lower income taxpayers would be encouraged to save through individual development accounts, which offer a dollar-for-dollar government savings match up to $500. Companies that convert traditional pension plans into employee savings accounts would be penalized for harming older workers. For five years after the conversion, the accounts would have to be at least as valuable as the benefits an employee could have expected from the pension.
All of the ideas must pass muster in Congress before becoming law.
The savings proposals met immediate resistance among Democrats and even a few Republicans, despite a change from last year that reduced the annual contribution limit for each to $5,000 from $7,500.
"Instead of providing more savings tools for those who are already saving, I would rather focus on ways we can help those who otherwise can't afford to save to do so," said Montana Sen. Max Baucus, the top Democrat on the Senate Finance Committee.
Ohio Republican Rob Portman cheered the retirement savings accounts but faulted the lifetime savings accounts for promoting only short-term saving. "I believe there is a greater need to promote long-term savings," he said.
Congress has already spent months chewing on a number of the tax ideas restated in this year's budget, including tax breaks for energy production, incentives for charitable giving, and the renewal of tax credits for research, job creation and homeownership.
The White House also picked up a few ideas from Congress, backing efforts to reduce inflated deductions for donated cars and intellectual property, as well as shut down a leasing transaction used by local governments to raise money and by private companies to increase their tax deductions.
The Treasury Department refrained from offering ideas to overhaul the alternative minimum tax, which originally curbed tax sheltering among high-income taxpayers but increasingly affects middle-income families.
It also only offered general guidelines to lawmakers trying to avert a trade war with Europe over a U.S. export subsidy. However, the administration for the first time suggested a corporate rate cut as one way to make up for eliminating the tax breaks for exporters.
Continue with:
| 
