From 2008-2010 investors that fall in the low and gifted 10% or 15% tax brackets will have great capital gains benefits.
For the next three years from 2008 to 2010 in the tax brackets of 10% or 15% will not have to pay anything on qualified long-term capital gains and qualified dividends. In the above tax brackets to familiar 15% rate will still apply. For the short-term capital gains and disqualified dividends you will pay the marginal tax rate just like other ordinary income.
That means extra money in your pocket and a major tax relief if you do qualify.
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- Filed under: Taxes
- Date: Feb 7,2008
While consulting a tax adviser I was given some pointers on some common tax deductions that can be made but sometimes are over looked. Some need to be itemized while others do not need to be itemized.
Common Federal Tax Deductions that needn’t be itemized
- Capital losses which are realized losses that can offset unlimited capital gains or $3,000 in income.
- Retirement contributions such as Traditional or SEP-IRA, 401(k), etc.
- Student loan interest that are up to $2,500 per year and only on qualified student loans.
- Business expenses which are for business owners and employees with certain un-reimbursed expenses.
Common Federal Tax Deductions that need to be itemized
- Home equity loan deduction in which you can deduct interest paid during the whole year.
- Home mortgage deduction in which you can deduct interest paid during the whole year.
- Medical expenses where you can deduct those in excess of 7.5% of your AGI and I recommend getting help on this one.
- State and local taxes or sales tax.
- Charitable contributions such as cash and property donated to qualified organizations.
- Personal casualty and theft losses where you deduct your loss minus insurance payments.
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2008 is here and along with a new year, there are changes. IRA-related legislative changes for 2008 are now as follows:
- You can now roll assets directly from a 401(k) to a Roth IRA - In the past you first had to through funds into a traditional IRA and then convert it into a Roth IRA. It makes the whole deal a little simpler but the same taxes still apply. You cannot get over good Uncle Sam. This can be done right away considering that you make less than $100,000. However in 2010, this limit goes away.
- IRA contribution goes to $5,000 - if your under 50 you can now add $5,000 and if your older you can now add up to $6,000. Also, starting in 2008 contribution limits will now be indexed to inflation in $500.00 increments.
- Income limits for deductible IRA contributions go up - now your entire IRA contribution will be tax deductible if your modified adjustable gross income (MAGI) doesn’t exceed $53,000 for a single filer or $83,000 for joint filers.
- Income limits for Roth IRA contributions go up - Now you can make the maximum Roth IRA contribution if your modified adjusted gross income (MAGI) doesn’t exceed $101,000 for a single filer or $156,000 for joint filers.
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Men’s Health gives us four steps to retiring rich. Some of the tips (the first two) come from the author’s discussion with Mr. Warren Buffett.
Here the list:
RULE 1: Instead of trying to time the market, try to tie it. Unless you’re a top sensei yourself, don’t try to beat the market. Instead, cast the widest net possible using index funds. Buy a fund that tracks the S&P 500 or maybe even the entire U.S. stock market. If you’re able to lock in the gains of the market–roughly 10 percent a year, historically–you will have accomplished a vast amount.
RULE 2: When you’re tempted to sell, buy. When stocks are in the tank, your gut will tell you to bail, to move your money into less-volatile investments like bonds or money-market funds. It’s human nature. It’s also a huge mistake. When the market plunges–over days, months, and years–there are opportunities to make real money.
RULE 3: Collect sectors. But you have another best friend, one you don’t spend a whole lot of time thinking about: diversification. You don’t want to be thrown for a huge loss by drops in any one sector. Make sure your holdings cover the entire investment field, so if “energy” collapses, you might be protected by gains in, for example, “financial services” or “health care.” This is another great reason to invest in an S&P 500 index fund: It comprises stocks from virtually every sector.
RULE 4: Invest in yourself (involuntarily). Chances are you’re putting away money for retirement automatically; your employer takes it out of your paycheck, pretax. If you ever want to amass a lot of liquid assets–that is, money you can spend today if you want–you need to set your savings to automatic, as well.
So my Comments on each are:
- Big thumbs up here because index funds are well diversified and come with no-load fees and very low expense fees.
- This is also absolutely true because this is where stocks/shares are and will be at there cheapest so in times like this buy as much as you can and save in times of high bubble prices.
- Yet another beauty of investing in index funds.
- This way you never forget and it is all done for you.
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There was a great post today at Get Rich Slowly that answers how investing in low fee index funds generates up to 33% more in savings.
Using a comparison between low fee index funds with no-load versus class-A mutual funds that do have load fees plus management fees tied to them. You lose up to 33% in fees right off the top every single time that you purchase more stock.
This not only beats down your potential for high returns but also lowers the amount of money that you can withdraw yearly by drastic amounts.
To fully see the drastic change in compounded wealth that is subtracted you have to check Get Rich Slowly “How Lower Fees and Expenses with Index Funds Could Mean 33% More to Spend in Retirement.”
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The debate is in and it is a very touchy and personal decision.
First let’s talk about the pure proud feeling of knowing that you finished paying off for your house. Another factor would be that you would be reducing your mortgage term significantly. Another factor that you have to include is that all interests that you pay towards your mortgage is tax deductible. Let’s say if you were to enroll yourself in bi-weekly payments and/or if you were to just add an additional 10% of your monthly mortgage payment just to principal you would cut down the term by about 3/5.
Now let’s say that you were to instead invest that extra money into a index fund or better yet an Exchange Traded Fund (ETF) in the stock market. For one point, the 10%-14% that you could have compounded within the years would have been greater then paying down the mortgage of a 5%-7& interest rate.
That is the question that you must ask yourself. Is the interest on your mortgage a comparable rate when compared to the stock market returns of a index fund that is well diversified. If you are looking to gain upwards of 4% and are willing to test the waters and have a good risk tolerance for long investments then by all means then you should invest in the stock market.
You would be able to invest and after say 10 years you would have a great deal more net worth and capital then if you decided to just prepay your mortgage instead.
If this article has intrigued you then please go to Investing Versus Paying Ahead on Your Mortgage: Which Makes More Sense? and Question From a Reader: What to do With My Mortgage?
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A house or real estate property is by far the best investment to make if you can afford to right now.
Benefits of Owning a House or Real Estate Property
- Forces you to put away money in the form of mortgage payments.
- Houses generally and mostly do not go up and down as the stock market does.
- Most of the time a house always continues to build up equity.
- If you live in the house, you get the added benefit of enjoying it as well.
- Later on you can sell it and cash in or turn it into a revenue generating cash box.
If you cannot afford one right now, you should save as much as you can on a weekly basis or a paycheck basis. Save like 20%-5% into a secret account in which you pretend to forget about then throw that money into the stock market and the bonds market.
Simply invest 40% into iShares Lehman US Aggregate Bond Fund (AGG) and put the other 60% into SPDR Trust, Series 1 (SPY).
Keep saving and compounding and you will get there.
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