Year End Tax Tips

Since 2010 is about to come to a close, and 2011 approaches, you should at least take a few moments to think about a year end income tax strategy. There are many areas you should be thinking about. These helpful tips just may lower your tax bill and save you money.

1. Income, expenses and deductions: If you are thinking about making any adjustments, you should look at how much you currently earn, spend and save, then consider any additional items you could deduct.

2. Check investment portfolio: If you have higher than normal capital gains, consider a last minute loss from a sale of stock to offset any capital gains income. Especially if the stock is a loss that may not show any positive returns in the near future. Better to benefit form the deduction than continuing to lose money anyhow.

3. Additional income deferral: If you have additional income, you may be able to defer  this until after the start of the new year. This is especially helpful if you are self-employed. You could simply wait until late December to send out invoices due so you would receive these payments after December 31st and into January of 2011.

4. Pay January 2011 mortgage payment early: This is helpful if you need an additional mortgage interest deduction to offset another gains. Don’t forget to add this additional interest to the amount reported on the 1098 misc interest form sent by your lender.

5. Teachers; deduct your students: Teachers may take up to a $250 deduction on any materials purchased personally for your classroom. This tax deduction may also be taken by principals and anyone else employed by a school. Please consult with a tax professional if you are not sure about how to deduct this.

6. Self-employed; Big purchases: If you already planned to make any larger purchases in the near future, consider taking the plunge by year end for additional tax benefits and deductions. Purchasing business equipment or supplies are perfect last minute tax deductions, but make sure to save all your receipts.

7. Pay state taxes early: As long as you don’t see your personal income tax bracket being higher in the new year, you might want to make state tax payments prior to the end of this year. This allows you to take the additional deduction this year, rather than waiting until the end of next year.

8. Charitable donations: If you are fortunate to have additional money this time of year , consider donating some of this money to a charity. Save the receipts and use the charitable donations as deductions on your tax return. This is a wonderful thing to do, and you also benefit at the same time.

Regardless of which tips you are able to actually benefit from, you should always consult a professional CPA or tax preparer for any additional questions or concerns about any tax deductions or expenses you have thought about before year end.

Don’t Lower the Sales Price, Buy Down the Interest Rate

Instead of lowering the sale price of a home, the seller can offer to pay for a buydown of the interest rate for the borrower on a temporary basis over the first several years of the loan. A temporary buydown allows a lower interest rate on a mortgage for a fixed period of time at the beginning of the mortgage term. Temporary buydowns are not a type of mortgage, but rather a temporary interest rate reduction option that can be used with most types of mortgages.

Buydowns allow for a reduced interest rate for a specific period, such as one, two or three years, with periodic annual increases until the payment reaches the fully amortized rate. The borrower is locked in at the fully amortized note rate with the buydown option. The lender receives the market rate on the loan for the borrower’s payment, during the buydown period, which is “subsidized” by the cost of the buydown.

The following example uses a 3/1 buydown program based upon a 30 year fixed rate, $400,000 loan amount.

The note rate is 4.0%. For the first year, the note rate is lowered by 3%. The second year, the note rate is lowered by 2%. The third year the note rate is lowered by 1%. In the fourth year, the rate is at the note rate of 4.0%.

Year      Note Rate/Payment         Buydown Rate/Payment          Monthly Savings    Annual Savings

1             4.0%/$1,910                          1.00%/$1,287                                 $623                            $7,476
2             4.0%/$1,910                          2.00%/$1,478                                $432                             $5,184
3             4.0%/$1,910                          3.00%/$1,686                                $224                              $2,688
4-30     4.0%/$1,910                          4.00%/$1,910                                 $0                                   $0

The buydown payment savings is $15,348. The cost of the buydown is the amount of the actual savings, in this example, $15,348. The buydown program is eligible on conforming loan products including fixed rate fully amortized loans, adjustable rate mortgages, owner-occupied and second homes, single family, condominiums and 2-4 units. Sellers can use the buydown program to maintain their home’s price while still offering a strong competitive advantage to other homes on the market.