Now that the April 15th deadline is behind us, the best personal finance advice you can take is to start planning for your 2010 Income Taxes now. That way, you will be ready to take advantage of all the 2010 tax tricks, tips and deductions you can.

Sure, last minute tax advice and finding those hidden tax deductions during crunch time is great, but to really save money on taxes, you have to plan all year long. Start watching now for expenses that you can deduct from your taxes and start keeping records and receipts for all of those possible tax deductions that might be usable to lower your taxes if you meet certain requirements or minimum thresholds. Most importantly, start keeping your contemporaneous records of important deductible expenses like business mileage, unreimbursed expenses, training and education expenses, and medical expenses.

IRS 2010 Standard Mileage Deduction Rate

The standard mileage rate for 2010 is 50 cents per mile for business reasons. The 2010 standard mileage rate for miles driven for charitable purposes is 14 cents per mile.

You can deduct all unreimbursed mileage driven for business reasons and most charitable reasons as long as you have written documentation of the miles driven. These records must be "contemporaneous," which basically means that you need to create the record as it happens. In other words, you need to be recording your mileage in a little mileage log book every time you drive somewhere. Creating a log at the end of the year won’t cut it.

There is no need to buy a mileage log specifically, however, many people find it useful to have the format for recording their business trips in place. It can also make filling in the data easier. Most importantly, by completely filling out one of the mileage logs that you get at an office supply store like Office Depot or Staples is that you can be sure that you are writing down all the information that is required to take the standard business mileage rate for 2010 deduction from your taxes. Otherwise, any notebook will do. Write down your starting and ending mileage (use the main odometer reading, not just the trip odometer) and the total miles. Be sure to note whether that is one-way or round trip. Also note what the business reason was for making the trip.

Small business tax deductions are important in order to offset high business taxes levied against small business owners and entrepreneurs. This is especially true for work from home entrepreneurs who file as sole proprietors, or as a Limited Liability Company aka LLC, with sole proprietor tax status. Small business owners can get hit with high tax bills thanks to Self Employment Taxes.

Self-employment taxes, or SE Tax, is so high because it includes taxes that would usually be paid by the employer. In a typical employer-employee scenario, the employee pays 6.2% in Social Security Taxes. The employer withholds this amount from the employee’s paycheck. What many people don’t realize is that the employer also pays 6.2% in social security tax for the employee.

A small business owner that files as a sole-proprietor is on the hook for the whole amount! The self-employment tax rate for 2010 – sometimes called the SE tax rate – is 15.3%, which is 12.4% for social security taxes plus another 2.9% for Medicare taxes.

That 15.3% is on top of regular Federal Income Taxes. A successful small business owner in the 30% tax bracket, pays a blood curdling 45% tax rate. And, that is before adding in Medicare tax and state and local taxes.

In other words, a small business owner can easily end up paying 50% taxes!

Deduct Self-Employment Tax

The only good news in this whole equation is that half of the self-employment tax can be deducted when figuring adjusted gross income. Of course, this is small consolation because it results in under 2% tax savings. In order to keep from paying too much income tax, the entrepreneur needs to find bigger tax deductions and other small business tax breaks.

Depreciation Rates

Some of the biggest small business tax deductions come from the purchase of equipment for the business. Unfortunately, big purchases are often considered capital expenditures that must be depreciated over the “useful life” of the product. The best small business tax advice is to get accelerated depreciation whenever possible to get higher tax deductions now.

The only defense against high taxes from running a small business is to get as many business tax deductions as possible. The business lowers its profit for tax purposes, and passes along less income to the business owner on Schedule C – Profit and Loss From Business Operations.

Section 179 Deduction

IRS Section 179 allows for better small business tax deductions and bonus depreciation in some cases. A section 179 expense allows for business expenditures to be deducted immediately, instead of depreciated. This is very useful for dated tax depreciation limits like those that apply to high-tech equipment.

For example, a freelance writer needs a netbook for his freelance writing business, with a Section 179 deduction, the small business owner deducts $200 in the year the netbook was purchased, instead of deducting a measly $40 per year for five years.

The Section 179 tax deduction rate was set to drop back to $134,000 after the special bonus depreciation and higher 179 limits increased in economic stimulus legislation expired after 2009. However, the new jobs creation legislation recently passed by Congress extends the higher ceiling for Section 179 tax deductions. The 2010 Limit for Section 179 Deductions is $250,000 for qualified capital expenditures. There is currently no extension of the higher amount into 2011; that may change depending on how the US economy recovers in 2010.

Maximizing Section 179 Tax Deductions is important personal finance advice for any entrepreneur. More 2010 tax tricks and updates are coming soon. The new IRS Mileage Rates for 2010 and other IRS numbers for this year are already published.

How do you save on your small business taxes?

Sometimes it seems cold and heartless to think about money and tax deductions. With hundreds of thousands dead and untold masses homeless, not to mention a country destroyed, this can seem like one of those times.

On the other hand, when people choose to open their hearts and give money to help those in need, the U.S. Government thanks them in the form of the charitable tax deduction. Typically, donations to charity must be made by the end of the tax year, December 31st, in order to be deductible in that year. However, with the tragic earthquake that struck Haiti, Congress passed a law and the IRS implemented an exception to the rules for certain cash contributions for Haiti Relief.

In order to qualify, the donations must be considered “cash” donations (checks and wire transfers, and so on do count as cash). They must also be made to a qualified organization, typically a non-profit 503(c) organization in most cases. The donations must also satisfy all other normal requirements for deducting cash gifts to charities.

The deadline for making a cash donation for Haiti relief and being able to deduct it on your 2009 Federal Income Taxes is March 1, 2010 (today).

If you already made a donation, you can deduct it from your income taxes as well.

Unfortunately, one of the requirements for taking a tax deduction for a cash contribution to a charity is retaining proof of the contribution, most often, in the form of a receipt. However, in the aftermath of the Haiti tragedy, numerous new methods of making quick and easy donations to relief organization were created, including the ability to donate via text message.

A live television show broadcast nationwide ran numerous donation options across the bottom of the screen during the Haiti Relief telethon, including the option to donate $10 via text message. The $10 donation was then added to the phone bill of those who sent such a text.

Fortunately, the IRS has clarified that a phone bill from your cell phone company or other telecom provider will satisfy the record of proof requirement. This 2009 tax trick is particularly helpful for those of us who made donations upon seeing the devistation without pausing to think about the tax implications.

Be sure to hold on to your phone bill, however, for your records. If you follow smart financial advice about paying your bills automatically and opt-in for electronic statement delivery as one way to help prevent identity theft, then you need to log on to your account and print out the electronic statement to ensure that you have a printed record of your donation.

When it’s tax season, everyone’s thoughts turn to tax deductions. Financial advisors and accountants alike are flooded with calls from frantic clients looking to save money on taxes by finding new deductions or other 2009 tax tricks. The most common question by far is, “Is this Deductible?”

Unfortunately, many tax deductions are either too small to have very much impact on how much taxes you pay, or are too narrowly tailored to actually be a tax deduction that most people can take. Add into the mix the fact that many of the things that people “just know” are tax deductible, actually are not tax deductions until they are higher than a certain “floor”, and most searches for new tax deductible items end in dissapointment.

The good news is that some big items are deductible for almost everyone. These are the best tax deductions out there and they are good for high-income taxpayers and lower-income taxpayers alike. These include deducting mortgage interest, many educational expenses, and tax deductions for children, and the related child tax credit. One of the other biggies that can bring tax burden relief is deductible property taxes.

Deducting Property Taxes on Income Tax Forms

Many people are surprised to find out how much property taxes they pay on real estate, particularly on their primary residence. This is because a large percentage of home owners pay their property taxes via their mortgage loan.

That is, that the mortgage company collects an extra amount of money with each payment which it keeps in an escrow account. Over the year, that extra money adds up to enough cash to cover the amount of property taxes due. If it the escrow account comes up short, the mortgage company fronts the money and then increases the part of the monthly loan payment for escrow.

Even though the mortgage company handles paying the property taxes for you, it does so with your money, which means you are the still the one who paid the property taxes, and therefore, you are the one who gets the property tax deduction. Check the 1099-INT tax form the mortgage company is required to send you each year. Both the amount of mortgage interest paid for the year and the amount of property taxes paid annually should be listed.

Don’t forget about other property taxes too! The most common type of property taxes that are deductible, other than real estate property taxes, are the property taxes on cars. Automobile property taxes are deductible if they are computed based upon a percentage of the car’s value. In other words, the taxes that are levied by the state, county, or city that are a variable amount depending on how much the car is worth are deductible. Flat taxes and fees, such as a $25 annual fee,  that are the same amount no matter what the car is worth are not deductible.

Keep an eye on the mail for all tax forms, including 1099 Forms for real estate and brokerage and banking accounts. There are important tax numbers on each of these.

As the end of the year races toward us, the opportunities to find and take advantage of tax deductions and loopholes to save money on income taxes are growing scarce. Fortunately, there are still plenty of tax saving strategies that you can implement even with just a few weeks to go until the end of the tax year.

One of the most effective ways for typical households to lower their tax bill is by donating items to charities. Unlike cash donations, donating used goods to charity is a free way to reduce the income taxes you pay. A quick trip to the basement or storage closet could turn up several trash bags worth of used clothing that no longer fits your children, or you. Other items like shirts, pants, suits, jackets, shoes and more may just be out of style, or no longer fit your current dressing manner.

For example, workers who used to have to wear a suit and tie to the office may now work in a business casual environment. Unless you live on the East Coast, suit and tie occasions don’t come up all that often. Hold onto one dark suite for funerals and formal weddings, and one less formal suit for other semi-formal events. Even clinging onto one fun suit, or stylish suit that you "might" wear to "something" someday can still leave you with a dozen suits that can be donated to local charities. Keep track of everything you donate with "contemporaneous records." Take the receipt from the charity and fill it out right away, but also keep a log in a notebook or a note card of everything you donate.

If you haven’t cleaned out your basement or storage unit in the last few years, there might be TONS of used clothing in there that you can donate. Don’t be afraid to donate it all and claim every last penny on your income taxes. Again, just keep very good records of exactly what you donated and when. Back up the charity’s receipt with your own logs, and, for extra measure, take some digital photos of the clothing. There is no need to capture itemized pictures, a few pics of a giant clothing pile and maybe one or two of the twenty bags being dropped off at Goodwill should be more than enough proof to head off any challenge regarding how much you donated. (How much you valued each item at, is a different story, which will cover next year when we talk about how to prepare your 2009 Federal Income Taxes.)

Don’t stop at clothing. Small appliances (think anything that could be used in a dorm room or small apartment), electronics, sporting goods, and more can all be donated to charities that would gladly accept them.

As an added tip, break up your donations by dropping them off over several days, or donating a portion of your used goods to various different charities. The IRS requires additional documentation for single donations that exceed $400. Keep each donation under that amount, and relive the extra burden of documenting larger charitable donations.

With many charities having one of their worst year ever raising money for good causes, now is the time to pitch in and help out. By donating unwanted items that are laying around your house, you not only help good causes that you believe in, you can also make some money and save on your taxes next year at the same time. Plus, you house will be cleaner, and you might actually be able to find some of those important things that are lost in your storage areas.

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Updated Information for 2010 179 Deduction Limits for Small Business Taxes has been published.

Business tax deductions are important in order to offset high business taxes levied against small business owners and entrepreneurs. Business owners, particularly, single proprietors are often hit with high tax bills because of the Self Employment Taxes.

Self-employment taxes, or SE Tax, is so high because it includes taxes that would usually be paid by the employer. As an entrepreneur, the small business owner gets a double taxation whammy on things like Social Security taxes. The standard worker with a wage paying job at an employer pays 7.5% in Social Security Taxes. The employer withholds this amount from the employee’s paycheck. The employer also pays 7.5% in SS taxes.

The total Social Security Taxes adds up to a whopping 15%. A small business owner that files as a sole-proprietor is on the hook for the whole thing! That means that an entrepreneur pays 15% in taxes for Social Security on top of the regular Federal Income Taxes that they owe. For a successful small business owner with a high-income that puts him in the 30% tax bracket, that adds up to an astounding 45% Income Tax rate. And, that is before things like Medicare taxes, state taxes, and local taxes.

In other words, a small business owner can pay 50% or more very easily in taxes!

The only defense against such barbaric tax-rates is to take as many business tax deductions as possible. By doing so, the business lowers its profit for tax purposes, and therefore passes along less income to the taxpaying business owner on his Schedule C – Profit and Loss From Business Operations.

As an aside, this financial dance with the IRS is what causes legitimate, successful business owners to have trouble qualifying for mortgages or other loans. By the time these deductions are all taken, the income the business appears to earn can be substantially lower than its actual profits as they apply to the business owner’s bank account. This is why stated-income mortgages are so important for the self-employed. Unfortunately, scumbag mortgage brokers uses these mortgages to get unqualified borrowers into mortgages for houses that they couldn’t afford. These days, stated-income mortgages are all but dead thanks to these crooks.

Unfortunately, racking up sizable tax deductions by buying office supplies like paper, toner, and ink cartridges is difficult, even when paying the criminally overpriced rate for brand name printer ink and toner.

2009 Section 179 Limits Business Tax Deduction

The savior for many small business owners is IRS Section 179. Section 179 allows for a certain amount of business expenses to be deducted immediately, instead of depreciated over several years. This is particularly useful for out of date tax depreciation limits like those on computers. Imagine how laughable it is to deduct a netbook purchase over five years. Odds are a netbook will not last 5-years. Even better odds are that it won’t be "useful" in 5-years regardless of the what the IRS says.

With a Section 179 deduction, the small business owner deducts $200 in the year the netbook was purchased, instead of deducting $40 per year for five years.

Maximizing Section 179 Tax Deductions is a critical personal finance skill for any entrepreneur. Keep an eye here for more information on income tax deductions and paying Federal Income Taxes in the near future.

A great tax saving strategy, particularly for higher-income taxpayers is to start a small business. Many expenses that are not deductible for regular Federal Income Taxes are deductible to a business. For example, the mileage deduction is not deductible for personal driving purposes, and mileage driving to work is also not deductible. However, mileage driven for business purposes is tax deductible.

While starting a phony small business is not a good idea, no matter how big of tax savings can be achieved, there are many legitimate businesses that people can start. The key aspect of being legally considered a business for tax purposes is that there must be a profit motive to the activity. That profit motive must outweigh other reasons for engaging in the activity, otherwise, the enterprise could be considered a hobby instead of a business.

Formally incorporate the business with the Secretary of State in your state. Set up a LLC, it makes a great business structure for single-owner small businesses and is typically cheap and easy to setup. Filling out an online form and paying a registration fee is usually all that is required.

Then, get an Employee Identification Number, or EIN from the IRS. Unofficially known as FEIN by some people, an EIN is free and can be applied for and issued instantly online.

These steps go a long way toward legitimizing your business. Make sure you report a little bit of income along the way (verifiable income that comes with a 1099 is best) and your business can save you lots of money on taxes over the years.

(Finance Gourmet has no affiliation with MortageCalculatorium – They are stealing our RSS Feed – Come to the real personal finance advice site)

Small Business Tax Deductions That Regular Filers Can’t Get

With a small business, that trip to Office Depot is tax deductible. A business also makes it so you can deduct buying new computer equipment like monitors, printers, desks, chairs, and other office furniture. You can also deduct office supplies. All you have to do to save hundreds of dollars on your taxes is keep a mileage log for business purposes, and save those receipts for everything you purchase for the business.

When you file taxes for a LLC make sure to distinguish between office supplies like paper, toner, ink cartridges, coffee, notebooks, calculators, and so on, from capital expenditures. The difference lies in the usable life of the office equipment or office supply. Most consumables are considered office supplies, while items with a usable lifespan of years are considered equipment or capital.

The importance of this difference is that office supplies are straight tax deductible, while equipment or other capital expenditures may need to be depreciated. The definition of depreciation is that the amount deducted is equal to the amount of usable life that has been used up during the tax year. Since there is a lot of room for interpretation there, the IRS has formal depreciation tables and rules that state how long certain classifications of equipment must be deducted over. For example, if an item must be depreciated over 5 years, then the business can deduct one-fifth (1/5th) of the purchase price of the item in the first year, and then 1/5th, or 20% of the price in each of the four following years.

It is typically in the business’ best interest to deduct items as quickly as possible. Fortunately, small businesses can take advantage of a special tax provision for entrepreneurs and other small business owners.

2009 Section 179 Limit

Businesses may deduct the full cost of some items regardless of the usual taxable deprecation schedule as Section 179 Expenses. The Section 179 limits for 2009 is $250,000. That means that a business can deduct up to $250,000 worth of anything without having to depreciate it over the normal lifespan of the item. For high-income taxpayers, this offers a big tax deduction if used properly.

Section 179 Limits 2009 Vehicles

Deducting the cost of an automobile has been a favorite tax deduction for tax payers with high incomes. However, the total depreciation deduction for a passenger automobile placed in service during 2009 is $2,960, or $10,960 for automobiles that qualify for the special depreciation allowance.

The maximum deduction for a truck or van is $3,060 or $11,060 for those that qualify for the special depreciation allowance.

The old tax loophole for buying a Hummer, Suburban, or other heavy vehicle to get a bigger Federal Income Tax deduction has been largely closed.

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Ah, November, when the American mind turns toward Thanksgiving, Christmas shopping, and strategies to avoid paying too much taxes for 2009. Yes, you should be doing tax planning year round to achieve the maximum savings on taxes, but reality isn’t always so kind. Still, there are some end of year tax moves that are smart and some that just aren’t worthwhile tax strategies when you add up your tax savings. Figuring out which is which is a critical part of personal finance.

To avoid making tax moves that aren’t worth the trouble, there is a simple strategy.

Always calculate the real dollar amount of any tax strategy prior to implementation.

Tax Savings Strategy Example #1:

The Top 10 End of Year Tax Strategy Tips lists always include the barely usable advice to pay your January mortgage early. By paying your January mortgage bill in December, you get to deduct the interest from your payment in 2009.

There is a big, fat catch, however. Although you do get to deduct 13 months worth of mortgage interest in 2009, you will only get to deduct 11 months worth of interest in 2010 unless you make sure to make that January payment in December again next year. This will be true until you finally bite the bullet and take just 11 months worth of deductions, or you pay off your mortgage. Is it worth it? Maybe.

Calculate the real dollar amount of tax savings from paying your Jan. 2010 mortgage in December, 2009.

Grab a mortgage statement and find out how much of your monthly mortgage payment goes to interest. What you find might surprise you. If you pay your homeowners insurance and property taxes through your mortgage company (a common practice) a substantial chunk of your monthly payment goes toward those, and you do not get to deduct those items by paying them early. Likewise, if you have had the same mortgage for many years, or you have a 15-year mortgage, a big hunk of that monthly bill might actually be going toward principal. (The horror!

A $2,000 monthly mortgage payment might breakdown as $500 per month into escrow (for the taxes and insurance) and $500 per month going toward principal, leaving just $1,000 per month paying interest.

For a taxpayer in the 25% tax bracket, paying that extra mortgage payment a year earlier will result in a tax savings of $250 in real dollar numbers. Conversely, that will be the approximate cost of forgetting to do the same thing next year. Even worse, is if the taxpayer forgets to do the same thing next year, AND forgets to properly account for the fact on their 2010 taxes.

Tax Savings Blunder Example:

Assume our taxpayer pays 13 mortgage payments in 2009 thanks to the advice in a year-end tax savings tips article. He saves $250 on his 2009 taxes.

Let’s that come 2010, our taxpayer is very busy at year end racking up sales and commissions to increase his income. He doesn’t have time to read any of those tax advice year-end articles and isn’t really thinking about Federal income taxes as he flies around the country trying to make sales.

Come April 13th, he fires up TurboTax or some other tax preparation software and types in all the numbers. In the tax deductions section he inputs his mortgage information. If he used TurboTax to file taxes in 2009 or imported his 2009 tax returns, he might get a flag about entering his mortgage info, and maybe not. Even if he does, there is no guarantee that he will pay any attention to it as he rushes to complete his taxes. After all, entering in the mortgage information from the 1099-DIV the mortgage company sends is a no brainer, right?

Unfortunately, he includes all 12 months worth of interest on his 2010 income taxes. Since he did not pay the January 2011 mortgage payment in December 2010, he actually can only deduct the remaining 11 interest payments in 2010.

In 2011 or 2012, or taxpaying hero gets a phone call from the IRS. It’s informational audit time and the IRS would like to see additional documentation regarding his 2009, and 2010, mortgage deductions. The taxpayer does the smart thing and runs to a tax attorney, accountant, or enrolled agent, and finds out to his dismay that he owes back taxes and a penalty. Chances are, he’ll get out of any fraud trouble, but it still won’t be cheap to pay up, especially if it takes two or three years to get around to the audit and that interest payment has added up.

Tax Advice Worth It?

Is it worth a $250 savings to follow this tax advice? You bet it is! Why pay extra when you don’t have to. But, if the above example sounds a lot like you, you might want to think twice, or make a really big note in your 2010 Taxes file.

But, what if the taxpayer is in the 10% tax bracket? Don’t laugh, it’s possible for high-income taxpayers to save enough money through deductions to get down to a tax bracket of 10%.

Then, the above example is worth just $100. Many other tips and advice will produce raw dollar amounts of tax savings of even less, sometimes just $10 or $20 for a complicated strategy that involves collecting a lot of receipts and getting a bunch of tax forms just right.

In the end, you are the judge of what anything is worth to you. The important thing is that you know what its real value to you is before you waste time and money on something that has limited value.

Tax Deductions Value

One final, very important thing to consider when determining the cash value of any tax savings advice is its possible impact on other tax deductions. To determine whether or not this need concern you, pay attention to any tax credits or tax deductions that are phased out or that have income limits. Depending upon the tax deduction or credit and where the tax savings created by the strategy used occur (above the line or below the line) the value of a tax-savings tip may actually be much higher than just the amount directly created by the tax avoidance strategy.

Here they come.  Articles, columns, emails, and websites by the dozens (hundreds? thousands?) each offering tax advice in the guise of tips and tricks while actually offering up nothing more than the same old retread of a supposed gold mine of tax savings.

This is the true, cold, hard fact: There is virtually nothing you can do to lower the amount of taxes you pay on earnings that come in the form of a steady paycheck.  Sorry, but it is true.

Tax Advice and Tips and Tricks

So, what exactly is in these so called advice articles?  Mostly things that will not apply to most people, or nickel and dime savings that won’t make much of a dent.  But, tax advice articles are popular, especially at year end.  Let’s take a look at the most common advice.

• Pay Your Next Mortgage Payment By December 31 – This doesn’t lower your taxes so much as borrow a deduction from next year’s taxes.  The idea is that by paying your January 1st mortgage payment in December, you get to deduct 13 moths worth of interest, instead of 12.(Mortgage payments used to be due on the 1st of the month, that isn’t always true anymore, but old tricks die hard.)  While this works, it works one time.  Worse, you have to do the same thing every year from now on.  Why?  Because you already deducted your January mortgage interest last year, you will only get to deduct 11 months worth of the interest the following year unless you pay the year after January payment early too.  This idea is really only valuable to people whose income varies from year to year.  If this was a good year for you, then you could use this trick to help lower your taxes in this high income year.  Then, if the next year or two you have a bad year, you can “reset” this trick by not paying the January mortgage in time.  Sure, you’ll only get to deduct 11 months worth of interest, but if your income is significantly lower then it works out.
• Charitable Donations – This one is actually very true.  Make your charitable donations by December 31, and you can save on taxes this year.  Unfortunately, for most people, this is small potatoes.  Look at it this way.  If you made $100,000 this year and you end up paying 20% that is $20,000 in taxes.  By donating $1,000 in December, you reduce your income to $99,000 and pay 20% which is $19,800 in taxes.  Sure, it is a savings, but the difference between $20,000 and $19,800 isn’t what most people mean when they ask how to lower their taxes.  Unless you are donating big (and if so, you should set it up before December so there is no rush) this won’t make much change.  Still, if you have a donation sitting in your garage, get it in by December 31.  Everything helps, just don’t expect miracles.
• Selling Investments to Generate Taxable Losses – If you learn one thing about investing ever, please let it be this: Always do what is right for your investment strategy/plan FIRST, then worry about taxes.  Sure, lots of your investments may be negative right now, but that doesn’t mean that selling is the smart move.  If you have mutual funds that you did not pay a load for and will not pay a load to sell them, AND you have a replacement fund in mind that you can also purchase without a load, then selling to generate losses makes sense. Otherwise, if you have good investments, keep them.  Remember, you can only deduct your capital losses against your gains, so if you don’t have profits you can’t deduct the losses, except for $3,000.  The rest carries forward until you have gains. Generating $15,000 of losses doesn’t do you any good for your taxes this year.
• Scheduling Medical Appointments or Other Medical Expenses – Repeat after me: Getting medical expenses in before the end of the year is smart in order to spend all of the money in a flexible savings account, not because of deductions.  In order to deduct medical expenses, they have to exceed 7.5% of your income.  If your income is $100,000 you can only deduct expenses that are OVER $7,500 for the year. In other words, $8,000 worth of medical expenses gives a $500 deduction.  Unless you don’t have insurance, or you had a lot of medical problems this year, there probably isn’t anything for you here.
• Other Expenses – Everything from moving expenses, job training, to tax preparation fees falls under the miscellaneous deduction.  In order to get any deduction, these expenses have to exceed 2% of your income.  Again, if you have $100,000 income, you’ll need $2,000 in expenses before you save one penny on your taxes.  If you are close, then spend away.  If not, then you are better off waiting because you might be over it in 2009.

There are good legitimate ways to save on your federal income taxes.  However, most of them can’t be done with ten or twenty days notice.  So, make your donations and spend down your flexible spending accounts, but don’t sweat the other stuff.

By the way, you have until April 15 of next year to make your IRA contribution.  We’ll cover that in another post.

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By any measure, the math says that paying off your home is not a smart move financially. Then why is it that so many people see paying off their home as a great goal?

There are three reasons really. One is out of date thinking, the other is a financial myopia, the last one is No Discipline Syndrome.

Out of Date

Out of date thinking, or as I like to call it “Old Timey Wisdom” (like in Oh Brother Where Are’t Thou – Old Timey Music). Old Timey Wisdom is wisdom that was once true in different times but may not hold up today.

Just one generation ago, paying off your house meant financial security. Often, this was a major deal to this generation, because one generation before a lot of people lost their homes at various times, but most notably during the Great Depression. The wisdom became that as long as your house was paid off, you never had to worry about a huge part of your financial security.

So what is different today than just a few decades ago? Well, then, it was likely that the first house you bought could be the one you lived in your whole life. Of course, there was the concept of a “starter home” which was a cheaper house that you bought first with the idea that you would trade up to your “real” house later after on in life. Even then, it was very likely that you would pay off your house not by doing anything clever, but by simply living there for 30 years until the mortgage ran out.

How likely does that sound today? Between transfers and promotions, layoffs, new opportunities, moving for better schools and so on, the average person will own something like five to seven homes. Do the math. If live in 7 different houses each for just 3 years, that means you will live in six non-permanent houses and it will take you 18 years to do that. If you buy your first house at age 21 then you won’t buy your final house until you are 39 years old. Pay off a 30 year mortgage and you’re 69 years old. That’s great, but it isn’t quite the same as your parents or grandparents might have done.

The other HUGE difference is pensions. Just a generation ago, it was common to work for the same employer for thirty years. At the end of that career you got a pension.

A house isn’t free even if you own it free and clear. There are property taxes, maintenance, insurance, and heating and cooling. With a pension, you had a way to take care of some of these expenses. Without a pension, you have to have some other money to take care of these ongoing expenses. Don’t forget you have to live on that money too. As a professional financial planner I saw a lot of people who didn’t count on that fact and now  they don’t know what to do.

Financial Myopia

With financial myopia you can see something great, but you have a hard time seeing other things. In this case, you can see very well that ever month your biggest expense is your mortgage payment. You think that if only you didn’t have that mortgage payment, then things would be different. If I had a nickel for every time I heard this line of thought, I’d have my house paid off!

While paying off your house isn’t a bad thing, it is important to look around and see the whole financial picture before you make any moves in this area.

Savings First

First, do you have sufficient savings. Once you send the money into your mortgage company it is gone. You can’t get it back. No matter how much you owe or don’t owe on your house, First National Mortgage isn’t going to mail you a check for $10,000 when your water heater blows out and leaks all over your basement the same week your car starts making a funny sound. That money is what we call “dead equity.” Yes, it is your money, and yes, it helps your net worth, but it can’t be moved to take care of other needs. It is dead to you. I know what you are thinking. You can get a home equity loan.

The home equity loan rescue plan has trapped more people than I can count. For starters keep in mind that no matter how much equity you have in your house a home equity loan or a HELOC are still loans. That means you are going to have to qualify for the loan. That means you are going to have to have a job (or other income) that pays the right amount for the payment. Too many people lose their jobs, eat up their savings, and then go into the bank looking for a home equity loan. Sorry. They don’t give loans to people that don’t have a way to pay them back. It takes a lot of work to foreclose on your house and sell it to get their money back. They want to make sure that it isn’t likely they’ll have to do it.

Do yourself a favor and make sure you have built up a sufficient cash reserve BEFORE you start sending extra money to your mortgage.

Retirement?

Remember the whole no-pension thing? Without a pension you have to count on yourself for your retirement income. Here is what I see every day that people have forgot to think about.

If you have a $400,000 mortgage and $400,000 in the bank, you can continue to make your mortgage payments. You can also eat, pay the light bill, and occasionally buy something for yourself.

If you have a $0 mortgage (house completely paid off) and $0 in the bank, you don’t have to make a mortgage payment. Good thing because you don’t have any money. Oh, you also can’t eat, pay the light bill, or buy anything for yourself. Even worse, at least once a year you are going to owe some property taxes. I guess you’ll be selling off your furnishings in order to stay in your house. Again, if you are thinking home equity line here, you are busted. Unless you get it before you retire, no one is going to set one up for you. Even if you do get one are you really getting anywhere? Is it any different to owe $400,000 on a equity loan than to owe $400,000 on the mortgage.

What to do before you pay off mortgage isn’t easy to figure out, but here are some good personal finance tips to start with.