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HOW ARE YOU DOING WITH YOUR
FINANCIAL RESOLUTIONS FOR 2002?
Making New Year's resolutions is a
piece of cake, especially after a few glasses of champagne.
Following through on your resolutions is much more challenging.
Last month, did you make any resolutions concerning your personal
finances? If so, how are you doing so far?
Below are seven resolutions to
improve your personal finances:
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Maximize Your 403(b) or 401(k)
Plan Contributions. At work, you probably have the
opportunity to save for your retirement through a 403(b) or a 401(k)
plan sponsored by your employer. The maximum contribution is
$11,000 this year ($12,000 if you'll be age 50 or older by December
31, 2002). Amounts contributed to these plans reduce your
taxable compensation and grow tax deferred. Unless you're
already contributing the maximum to these plans, now's a great tiime
to instruct your employer's benefit department to increase the
percentage of your salary going towards your 403(b) or 401(k) account.
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Contribute $3,000 to your IRAs
this year. The maximum contribution into your traditional
IRA or Roth IRA has been increased to $3,000 this year.
Consider signing up with a mutual fund company to have $250.00
automatically transferred from your checking account into your IRA
each month. If you'll be aged 50 or older by the end of the year, you
can contribute an extra $500 into your IRA this year.
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Pay Some Extra Principal With
Your Mortgage Payment Each Month. Looking for a risk free
return on your money? By paying extra toward your mortgage each
month, you'll get a risk-free return equal to your mortgage interest
rate. Plus, you'll cut down on the number of years it will take
to pay off your mortgage and save quite a bit of interest over the
life of your mortgage. As a rule of thumb, try to pay extra
principal each month equal to at least 10% of your total mortgage payment.
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Save A Set Amount Of Money Each
Month Did you know that if you deposited $81.50 into
your savings account each month, the account would grow to be worth
$1,000 at the end of the year? To help you reach your goal,
make sure to periodically transfer the money out of your checking
account into a separate savings or investment account. By doing so,
it's more difficult to spend the money that you've managed to save.
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Take Advantage of the New and
Improved College Savings Opportunities. Starting this year,
money contributed to Education Savings Accounts (formerly Education
IRAs) and 529 Plans grow tax-free, as long as any money
withdrawn is used for college expenses, or in the case of ESAs, for
private elementary school or high school as well. You can
contribute up to $2,000 per year per child into an ESA, and up to
$50,000 at one time into a 529 Plan, subject to certain
restrictions. Plus, money can now be contributed into both
types of accounts on behalf of the same child during the same year.
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Pay Down Those Credit Cards.
If you owe money on your credit cards, determine how much you can
realistically afford to pay down during the year. For best results,
try not to charge additional purchases on those cards while you're
trying to pay down what you owe.
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Avoid Resolution Pollution.
Did you set so many financial goals that you'll end up attaining
none of them? If so, take this opportunity to restate your
financial resolutions for 2002.
NEED HELP WITH YOUR TAXES?
Check out our Directory of
Affiliated Offices to find a CPA near you who specializes in the
tax planning and preparation for young health care professionals.
THE HOME OFFICE DEDUCTION
Back in 1999, the home office deduction became much easier to
claim. No longer do you have to perform the income producing
activity within the home office to be eligible for the deduction.
Are You Eligible?
To claim the home office deduction, a portion of your home must be
used regularly and exclusively in connection with your trade or
business. According to the IRS, "to qualify under the
exclusive use test, you must use a specific area on your home only
for your trade or business [including for managerial and
administrative tasks]. And to qualify under the regular use
test, you must use a specific area of your home for business on a
continuing basis". If your home office is used for any
non-business purpose during the year, or only sporadically in
connection with your business, no deduction is allowed.
Big Benefit for Renters
If you currently rent an apartment or house, you stand to benefit the
most by claiming the home office deduction since rent isn't otherwise
deductible on your federal income tax return. Let's say you use
300 square feet out of your 900 square foot apartment as your home
office. If that's the case, you can claim one-third of your
rent and utilities as a home office deduction.
Homeowners Beware
If you're a homeowner, deciding whether to claim the home office
deduction isn't so easy. Remember, your two biggest household
expenses, mortgage interest and real estate taxes, are already
deductible. So what's the benefit? You might save some
taxes by deducting a portion of your utilities, insurance,
maintenance, and home repair, and by claiming depreciation on the
business portion of your home. Plus, if you're self-employed,
taking the home office deduction should cut down on your
"self-employment taxes".
The problem arises when you sell your home. Even though most
people aren't taxed when their principal residence is sold, the
portion of the gain applicable to the home office will be taxed,
unless no home office deduction was claimed for at least two full
calendar years prior to the year the home is sold. Plus, any
depreciation previously claimed becomes taxable upon the sale.
Because of these two pitfalls, it's not uncommon for homeowners to
forego the home office deduction.
How to Claim the Home Office Deduction
To claim the home office deduction, you need to complete and attach a
Form 8829, Expenses for Business Use of Your Home, to your federal
income tax return. On the form, you'll prorate your allowable
household costs by the percentage of your home that is used in
connection with your business. You'll then deduct those costs
directly against net self-employment income (on the Schedule C) or as
a miscellaneous itemized deduction (on the Schedule A).
IRS Publication 587, Business Use of Your Home
By claiming the home office deduction, you might significantly cut
your tax bill. To find out more, visit the IRS' website at www.irs.gov
and read through IRS Publication 587, Business Use of Your Home.
TAX AND FINANCIAL PLANNING
CALENDAR FOR FEBRUARY, 2002
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Month |
Income Taxes |
Saving and Investing |
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February |
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WAS BASIC FINANCIAL PLANNING ONE OF YOUR NEW
YEAR'S RESOLUTIONS?
If you're married, and you and your spouse need
some guidance, check out
NewlywedFinances.com.
(Brought to You By Your Friends at MDTAXES.COM)
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2000
& 2001
TAX FACTS
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For 2001, the standard deduction for a single individual is $4,550
and for a married couple is $7,600. A person will benefit by
itemizing once allowable deductions exceed the applicable standard
deduction. Itemized deductions include state and local income taxes,
real estate taxes, mortgage interest, charitable contributions, and
unreimbursed employee business expenses.
- For 2001, the personal exemption is $2,900. Individuals
will claim a personal deduction for themselves, their spouse, and
their dependents.
- The maximum earnings subject to social security taxes
has been increased to $84,900 in 2002 from $80,400 in 2001.
- The standard mileage rate has been increased to
$.365 per mile in 2002 from $.345 per mile during 2001.
- The maximum annual contribution to a 401(k) plan or
a 403(b) plan has been increased to $11,000 for 2002 from
$10,500 in 2001. And if you'll be 50 or older by December 31,
2002, you can contribute an extra $1,000 into your 401(k) or 403(b)
account this year.
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