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Financial Q&A

 


Q: Does it make sense to pay down my mortgage by making extra payments if I plan to sell the house in 5 years or less?
A: It definitely doesn't hurt to make extra payments on your mortgage. The key in looking at a decision like this is to make sure that you are optimizing your money. Make sure that you are paying off your highest interest rate debt. If your mortgage rate is 7% and your tax rate is 40%, then your net mortgage rate is really only 4.2%. If you have any credit card debt or other debt that is higher than this rate (auto loan, boat loan, student loan, etc) it might make sense to pay that debt off first.

Alternatively, if you thought you could invest the money and receive a return greater than your mortgage rate, that would also be a reasonable alternative to paying down your mortgage.

Getting back to your original question, it definitely makes sense to pay down your mortgage faster. Every extra payment that you make will not only reduce the amount of interest and increase the principal payment of the loan, but it will also do so for every payment made in the future (in your case, for the next five years).
Q: I adopted a child last year. I don't have a social security number yet. Will that affect my taxes?
A: If you are not able to apply for a social security number as of yet due to your adoption process pending or for other reasons, you can apply for a ATIN. An ATIN is an Adoption Taxpayer Identification Number issued by the IRS as a temporary 2-year ID number for the child in a domestic adoption when you are unable to obtain the Social Security Number (SSN) (Form W-7A). This can be used on your tax forms while the adoption or social security number is still pending.
 
This applies only if you are currently able to claim the child as a dependant. If these apply to you, then you can apply for an ATIN:
 

*The child is legally placed in your home for legal adoption by an authorized placement agency.
*The adoption is a domestic adoption OR the adoption is a foreign adoption and the child/children have a Permanent Resident Alien    Card or Certificate of Citizenship.
*You cannot obtain the child's existing SSN even though you have made a reasonable attempt to obtain it from the birth parents, the  placement agency, and other persons.
*You cannot obtain an SSN for the child from the SSA for any reason. (For example, the adoption is not final).
*You are eligible to claim the child as a dependent on your tax return.

 

When completing form W-7A, you need to know the child's name, the birth information, and the placement agency. This can be found in the placement documentation. In addition, A COPY of this placement documentation must be attached to and submitted with the W-7A. You then need to submit the form to your local IRS Tax Center or mail to the following address:

 

Internal Revenue Service
Austin Service Center
ATIN Unit
P.O. Box 934
Austin, TX 78767

 

After 8 weeks if you have not heard from the IRS about your application, you may call the Austin Service Center at (512) 460-7898



Q: What are the various income tax brackets?
A: That's a great question that alot of taxpayers do not know nor understand.  Your tax bracket is the amount of tax that you pay the IRS on your "top dollar" of income. The actual tax rate that you pay the IRS on your taxable income below your "top dollar" is less because the tax rates are graduated and because they are applied to you taxable income after tax deductions and tax exemptions. You may also be entitled to tax credits which you subtract directly from your tax liability on your IRS tax return.
 
2008 Tax Brackets
Tax Rate      Single Married              Filing Jointly
10%             Not over $8,025            Not over $16,050
15%             $8,025 - $78,850         $16,050 - $131,450
25%             $78,850 - $164,550       $131,450 - $200,300
28%             $164,550 - $357,700     $200,300 - $357,700
35%             Over $357,700             Over $357,700
Q: What is the difference between a IRA Account, a Rollover IRA, and a Roth IRA Account?
A: A Roth individual retirement arrangement (Roth IRA) allows tax payers, subject to certain income limits, to save money for use in retirement while allowing the savings to grow tax-free. All of the tax benefits associated with a Roth IRA happen when withdrawals are made: withdrawals, subject to certain rules, are not taxed at all. (This is in sharp contrast to a traditional IRA.) Stated differently, Roth IRAs convert investment income (dividends, interest, capital gains) into tax-free income. There are no tax benefits associated with contributions (no deductions on your federal tax return) because all contributions to a Roth IRA are made with after-tax monies.

Contributions are limited to $4,000 annually (as of 2007) and may be restricted based on an individual's income and filing status. In 2007, an individual may contribute the lesser of US$4,000 or the amount of compensation income from US sources to his or her IRA account(s). Compensation income includes wage income and self-employment income; it excludes investment and pension income, just to name two examples. A notable exception to the compensation rule was introduced in 1997, namely that married couples with only one wage earner may each contribute the full amount to their respective Roth IRA accounts. This is the "spousal IRA" rule, which states that married people who file their taxes jointly can count each other's income when figuring contribution eligibility. These contribution limits are quite low in comparison to arrangements that permit employee contributions such as 401(k) plans (see the article on 401(k) plans in this FAQ for extensive information about those accounts).
 
To Sum Things Up
 
Roth IRA                                                                                                   Traditional IRA
*Any earnings are tax-free if withdrawn after age 59 1/2                        *Any earnings grow tax-deferred until withdrawn after
 and the account has been open five years or more.                                  59 1/2 at which time they are taxed at your current
*Contributions (not earnings), can be withdrawn tax                                 rate.
 and penalty-free at any time.                                                                   *Contributions and earnings can be withdrawn penalty
*Contributions are not tax deductible.                                                         -free after age 59 1/2
                                                                                                                  *Contributions may be tax deductible.

Rollover IRA's
A Rollover IRA is an account designed to receive transfers from a previous employer-sponsored retirement plan.  By rolling over these assets directly, you maintain the tax-deferred status of the account, simplify the management of your retirement investments, and potentially increase your investment choices. Anyone can rollover their IRA as long as it's from a employer sponsored retirement plan.
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