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Archived Newsletters

• Tax Freedom Day Finally Arrives
• Buying A Vacation Home Can Be Fun And Profitable
• IRA Contributions Limits May Be Raised To $5,000

Tax Freedom Day Finally Arrives

From now on, your money is your own. Tax freedom day arrived this year on May 15th. It means that all of the money you've earned so far this year has gone to pay federal, state and local taxes.

The federal government is requiring two extra days of servitude this year over last year. The federal tax burden has grown by 14 days' pay between 1992 and 2001, according to government statistics. In contrast, state and local taxes have remained virtually unchanged.

For the average worker, it takes over four months' earnings to pay for all state, local and federal taxes. Obviously, wealthier individuals in higher tax brackets who live in high-tax states take the longest to "earn off" their tax commitments.

It wasn't always this way. In 1913, for example, tax freedom day came as early as January 30th. The size of the federal government has increased, however, necessitating larger taxes on individuals.

In 1900, government at all levels consumed nine percent of gross domestic product. In 1930, the percentage reached 12 percent. By 1960, it had doubled to 27 percent, and today it is over 35 percent.

Minding capital gains and eyeing tax-efficient investment products are a good way to start taking control of money earned in the rest of the year.

It's been an interesting year for many taxable investors, not only have they seen the value of their mutual funds decline, but they then have the pleasure of paying larger capital gains taxes. Scrutinizing your investment program, especially those where contributed ordinary income is deductible, is wise. Dumping poor performing mutual funds and moving assets into other investment vehicles like separately managed accounts, puts investors in control of their tax destiny.

Any time you can control the cost basis, you are better off. This is true for asset transfers, asset allocation and ultimately, tax minimization.

For some, especially those in higher tax brackets, employing tax efficient planning may make tax freedom day come a bit earlier next year. Call us for more ideas on how you can minimize your taxes next year.

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Buying A Vacation Home Can Be Fun And Profitable

In an intensifying search for investments that offer more stability and less fragility than the stock market, many people are getting down to earth one of the more fascinating real estate opportunities, vacation homes.

Houses and apartments bought not only for love but also for money can be a mighty investment. While purchased primarily for recreation, relaxation and retirement, they can be lucrative as rental properties and in their eventual sale

Vacation homes are in particular demand during the summer. When the weather gets hot, vacation homes get hotter. And you can expect the market for them to do well over the long term.

Many young parents will be looking for moderately priced houses to spend vacations with the kids, while the leading edge of the baby boomers -- now turning 55 -- will soon be scouring for places to retire.

Choice Turf
If you're considering investing in vacation homes, there are several things you should know.

You stand the best chance of collecting a steep rent when you lease out the home, or a high price when you sell it, if it has two characteristics:

First, the home has to be fairly easy to get to. The choicest turf is no more than a gas tank away from a big population area. If you can afford it, buy on or near the water. That's the surest bet for high rentals and capital appreciation.

Second, the land surrounding the property should have only limited potential for development. That automatically holds down the supply of housing.

Environmental laws that put a lid on construction are a speculator's best friend. They have made waterfront properties especially attractive investments. The state of New Jersey, for example, stopped a developer from filling in and building on some wetlands. In the three years after that ruling, prices of second-home plots in the area surged 300 percent.

Stay away from idiosyncratic vacation homes. The dwellings that hold their value best are those with exteriors that are in keeping with the area. And look for communities that have stable growth, strong zoning rules and a distaste for go-go construction projects.

Start With A Condo
You can start by buying a condo apartment and renting it out. Most condos require less capital to purchase and have fewer maintenance problems than single-family homes. About 25 percent of condos in the U.S. are held as investments.

Condo owners who live in their own units can deduct mortgage interest and real estate taxes from their taxable income. Landlords who rent out units can also deduct monthly maintenance costs, fire and liability insurance premiums, expenses for finding and screening tenants, commissions for collecting rents, costs of traveling to and from the property and depreciation - up to the limits set by tax laws.

If you don't use the home more than 14 days a year or 10 percent of the number of days you rent it out, your vacation house or apartment may well qualify as rental real estate.

If you're considering buying into a vacation home development that is under construction, ask the developer and real estate agent about the time-table for installing recreational facilities, community water supply and garbage disposal.

Real estate developers never stretch the truth, of course, but get guarantees in writing -- just in case. Check with the local real estate commission or Department of Housing and Urban Development to see if the developer has registered for interstate land sales and posted a substantial bond to pay for anything he or she inadvertently omits.

When negotiating to buy a vacation home, bargain vigorously. Bid at least 20 percent below the asking price.

Timing is critical in both the purchase and sale of vacation real estate. Because it is a discretionary purchase, prices fluctuate more wildly in economic booms and busts than ordinary houses. During economic slowdowns, buyers with cash in hand can find tremendous bargains in overbuilt areas.

It's important to shop around with several potential lenders for financing. Many banks will charge more for investment property loans than mortgages for second homes that you occupy yourself. Check with a local real estate agent or title company to find out which banks and other lenders offer the best terms.

Once you buy and rent out a vacation home, local real estate agents can help you find tenants and keep an eye on the property. The agents' fees range from 10 percent to 20 percent of the rent. For higher fees, managers of some resort communities will not only find tenants but also collect rent and take care of repairs.

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IRA Contributions Limits May Be Raised To $5,000

Legislation designed to boost Americans' savings rate by increasing IRA and 401(k) annual contribution limits has cleared two critical House committee votes.

The House Workforce Committee voted unanimously in favor of a bill that would hike contribution limits for IRAs to $5,000 and 401(k) plans to $15,000; makes pension assets more transferable and establishes incentives for small businesses to offer retirement plans.

The panel's vote came a day after the House Ways and Means Committee voted 35-6 to back the legislation.

The measure, which drew more than 300 cosponsors, is expected to cost $51.5 billion over the next 10 years. Supporters say it's long overdue, considering that Americans' personal savings have fallen into negative numbers, from almost 5 percent four years ago.

Tax-Advantaged Retirement Savings
The measure phases in the $5,000 IRA contribution limit by 2004, up from $2,000 now. It hikes maximum contributions to employee 401K savings accounts to $15,000 from $10,500.

Recognizing that workers are "increasingly mobile" - research showed the average worker will hold nine jobs by the age of 32 - the bill also allows employees to roll over retirement savings into various types of plans.

Rep. Rob Portman, R-Ohio, one of the bill's authors, explained that tax cuts of any kind should prod all Americans to save more money for their futures.

In addition to encouraging Americans to consume and to reduce debt, tax relief should also be used to grow savings.  Saving not only helps the long-term financial security of individuals, but it also produces a number of positive effects for the stock market and for the U.S. economy as a whole.

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