Vacation Properties and Income – Part 2

Another way for retirees to generate income from a vacation home is to sell it. By using the federal capital gains exclusion in conjunction with the sale of your primary residence, you can potentially realize tax-free income. Here’s how it works. The basic capital gains exclusion rules state that you must have owned and used the home as your primary residence for at least two years out of the five-year period ending on the date of the sale. If you are married, the full $500,000 exclusion ($250,000 for single homeowners) is available as long as one or both of you satisfies the ownership test (two years) and you both satisfy the use test (primary residence).

Vacation Properties and Income – Part 1

If you have a vacation home, you’re already aware of the enjoyment it provides and the benefits it can offer at tax time. But you may not be aware of how vacation property can be used to generate income in retirement or how it can play into an estate plan. In fact, vacation properties offer retirees a number of different options in managing their finances and estate.
Vacation property may be used to generate income in several different ways. The first, and most obvious, is renting it. The IRS allows you to deduct mortgage interest on your primary residence and one additional property up to a limit of $1 million in combined mortgage debt for mortgages taken out after 1987. Current tax rules also allow you to rent out a second home for up to 14 days per year without having to report the rent as income. If you rent for more than 14 days, the home is considered investment property, and rent must be reported as income. Converting the property to an investment property, however, allows you to deduct rental expenses, such as insurance and utilities, if you have a net profit on the property (deductions are limited if you report a loss). You can still use an income-producing property for personal use while maintaining your tax advantages — but only for the greater of 14 days or 10 percent of the total days it is rented. Maintenance days do not count as personal-use days, but use by in-laws or other part-owners does, even if rent is charged.

Simple Truths

As a financial advising firm, one of the simple truths we have learned is that relationships are the single greatest influence on how people use their money and plan for the future. When people talk about their hopes and dreams, they talk about the people they love. Their future, the life they wish to live, is always full of the people most important to them. They don’t talk first about dollars and cents, Dow averages, or bond yields. They talk about a spouse, a parent, a child. When imagining their financial futures, even those without family often focus on others, such as employees, friends, faith communities, and charities.

Keeping Your Emotions in Check…

In times like these, with the economy in a tailspin, and the stock market in the tank, investing requires an extra dose of patience, perseverance and perspective.
It takes patience to ride out the bear market, perseverance to continue to invest even through a difficult economy, and perspective to see the long-term picture and realize that recessions and bear markets are just part of the natural economic cycle. Slumping economies and bear markets of the past have always turned around — and there is no reason to believe that this time will be any different.

Saving for College

Saving for College
Another school year is around the corner and your children or grandchildren are that much closer to college. If you haven’t already started to save for their college costs, this may be a good time to talk to your adviser about setting up a tax-sheltered college savings plan.
By planning ahead, you can use a 529 college savings plan to give your children a head start on their college costs. There are two types of 529 plans: college savings plans and prepaid tuition plans.
College savings plans are state sponsored investment accounts that allow participants to contribute regularly. A 529 plan account grows tax-deferred and withdrawals from the plan for qualified educational expenses are exempt from federal income tax. There are no income limits.

How Are Your Spending Habits?

The Propensity to Consume

Most People and most societies consume what they can. Americans are notoriously short-sighted, as demonstrated by a low personal savings rate by international standards. There could be many explanations, from a standard of affluence that has distanced us from the struggle for mere survival, to our propensity to invent and create that places a premium on spending whatever money we have in order to create more. We are the consumer society. Just look at the ads in magazines or newspapers and calculate the percentage of them that sell what for most people are luxuries.
You may be surprised to find that you are guilty of a habit that dooms you to never having money. Some people who constantly feel money pressure buy themselves little treats or rewards, in part because they never have the money to buy themselves what they really want. But it’s precisely that accumulation of “little” expenses that prevents them from getting ahead. Many don’t even realize they do this. The only way to find out is to keep track of what you spend. Do it for a week or a month. Try to remember each expenditure, no matter how small. Record everything in a little notebook each day. Add them up in different categories at the end of your test period: food and drink, entertainment, utilities, gifts and so forth. Pay particular attention to the small expenditures on unnecessary items and see how they accumulate over time.

Trusts and How They Can Work For You

Trusts and You

Trusts are vehicles that can help shelter your assets from taxation and manage the property that you leave to your heirs. Simply put, you transfer property in the name of a trustee who manages it for the benefit of a third party, the beneficiary. One of the great advantages of trusts in their flexibility. They can be adapted to fit a wide variety of situations. In fact, as our attorneys at Wealth Enhancement Group say, “Trust is not the key word. Trust doesn’t tell you that much.”

What precedes the word trust tells you everything. The most important aspect of trusts is that they allow property to be managed according to the donor’s specific wishes, far into the future. Living trusts allow you to control trust assets; irrevocable trusts take away control but offer many attractive estate tax implications and more. Your advisers can help you determine which type of trust best suits your situation

Financial Questions You Should Consider – Necessities or Luxuries?

Necessities or Luxuries

Most spending falls into two simple categories: necessities and luxuries. Almost every dollar you spend could be divided in that way. The challenge of dividing our spending in such a way, however, is made more difficult because of the simple fact that most of us are not now and never have been in dire need.

Still, a “necessities versus luxuries” spending breakdown is useful for anyone trying to organize their finances and use their money efficiently. Most people spend most of their money, as opposed to saving, investing, or giving it away. Therefore, whether you are buying necessities or luxuries, spending has to be the starting point for any financial planning. A dollar spent is not a dollar that could be used in another way; a dollar not spent has the same future value as a dollar earned. You can increase the size of your financial pie only three ways: spending less, earning more, or, in some cases, paying less tax.

Securities offered through LPL Financial, Member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, a registered investment advisor.

College Savings Plans

School is almost out for the year and that means you are one year closer to the children in your life leaving for college. If you have grandchildren or children at home you’d like to help with their college education, it pays to start saving as early as possible.

The government has given us a tool that makes saving for college a lot easier. The 529 college savings plan is a great tax-advantaged program to help you get a head start on your children’s college costs.
There are two excellent options available to help you save for college-the 529 college savings plan and prepaid tuition plans. The money you contribute to a 529 plan grows tax free within your account and withdrawals from the plan for qualified educational expenses are exempt from federal taxes. By investing in a 529 plan outside the state in which you pay taxes, you may lose tax benefits offered by the state’s plan. Withdrawals used for qualified expenses are federally tax-free. Tax treatment at the state level may vary.

You might also consider a prepaid tuition plan. These are offered primarily by state colleges and universities to help you lock in today’s prices for tomorrow’s tuition costs. They allow you to pay tuition in advance to cover your child’s fees and expenses.

With prepaid tuition plans, your concern might be that your child may decide on a college in a different state. Fortunately, these plans allow you to transfer the value to out-of-state public and private colleges.
Don’t wait too long to start your college savings plan. Talk to your financial advisor about setting up a savings plan for you to ensure that your children or grandchildren have the resources they need to get a college education.

Covering your back
No matter how well we plan, unexpected adversity can take us off track. That’s why it’s vital to include risk management as part of your financial planning process.
It’s important to review your insurance coverage from time to time to make sure that you and your family are adequately covered to get you through difficult times. Do you have sufficient life, health and disability insurance? Does your homeowner’s insurance policy provide enough coverage to protect you from law suits that may result from mishaps at your home?

Find out if you have the coverage you need to make it through your difficult times. For your own peace of mind and the financial security of your family, take some time now to sit down with your financial advisor and review your insurance coverage.

By investing in a 529 plan outside of the state in which you pay taxes, you may lose tax benefits offered by the state’s plan. Withdrawals used for qualifed expenses are federally tax-free. Tax treatment at the state level may vary.

Securities offered through LPL Financial, Member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, a registered investment advisor.