Sunday, February 18, 2007
In this episode we’ll discuss tax credits and we’re going to speak with Stephen Fishman, author of Lower Taxes in Seven Easy Steps (Nolo) In a previous episode, we talked to Steve about tax deductions.
Many people are confused as to the difference between a credit and a deduction.
Here’s how it works. Let’s say you’re in the 28% tax category. If you had a $1,000 tax deduction, you would deduct that from your taxable income and then you determine your taxes. The result of deducting $1,000 is that you would save $280 in taxes. But if you had a $1,000 tax credit, you could deduct that directly from your taxes. So you would save $1,000 in taxes. So, a $1000 tax credit is always going to be more valuable –maybe three or four times as valuable – as a $1000 tax deduction. It all depends on your tax rate.
Nolo: Okay, we asked Steve Fishman what could a typical family do to maximize their tax credits? What’s available to your average tax paying family member?
Stephen Fishman: Well, if they had a baby, bought a hybrid car, added new insulation to their home, installed a solar water heater in their home, incurred child care expenses so that they could both work, and took night classes at a local college they could have reduced their taxes by approximately $6,000 to $7,000.
Nolo: It’s been reported that the average tax credit for a hybrid car is $2,000. We asked Steve if that was accurate
Stephen Fishman: Not necessarily $2,000. That depends on the type of car and its fuel consumption statistics., In addition, another factor complicates things. Congress didn’t want to allow too many tax credits for hybrids, so once a hybrid manufacturer sells 60,000 vehicles, the credit will be phased out over the following 15 months for all hybrids produced by that company. You can find the phase-out times and percentages in my book, and at the IRS website.
Nolo: That brings up another point, tax credits come and go. Some tax credits have been around for years and are more or less permanent—for example, the child care credit and low income housing credit, for example. Others have been created more recently and have scheduled phase-out dates. Congress can, and often does, extend credits that are scheduled to end. Some credits like the research and experimentation, work opportunity, and welfare to work credits have been extended one year at a time for several years. However, there is no guarantee that Congress will extend a tax credit so it’s always wise to act before the expiration date if you want to use a tax credit that is scheduled to expire.
As Steve pointed out there are various tax credits for homeowners and as he indicates in his book, fuel efficiency is the primary target, here. Among the credits, there are great breaks for homeowners who put in fuel efficient windows, roofing, insulation, and heating and cooling systems.
However, there are some rules you’ll have to follow: Homeowners must buy these energy efficient products during 2006 and 2007 and the total combined credit you can get for all tax years is $500, and no more than $200 of the credit can be for windows. The other thing to keep in mind is you get the credit only if the items you buy meet the energy efficiency specifications established by law and a lot of these specifications are quite stringent—for example, an electric heat pump water heater qualifies for the credit only if its energy efficiency is over twice as great as the current federal standard. Make sure the product you want to buy qualifies—don’t take a salesperson’s word for it. Also, more generous credits are available to homeowners who install solar water-heating or electric power systems in their homes.
Steve Fishman also mentioned that there is a tax credit for having a child. That child tax credit was created for low and middle income taxpayers. We asked Steve about the requirements.
Stephen Fishman: It is subject to an income threshold and the amount of credit you can take each year goes down as your income approaches that threshold amount. For example, a married couple filing jointly with one qualifying child gets no child tax credit if their adjusted gross income exceeds $130,000.
Nolo: We asked Steve Fishman what about tax credits for couples who adopt children?
Stephen Fishman: Yes, there is a tax credit for people who adopt children. The credit is equal to 100% of adoption expenses up to an annual ceiling. The ceiling was $10,960 per child in 2006.
Nolo: As Steve mentioned, there are educational tax credits, as well. Congress figures that well-educated taxpayers will make more money and be able to pay more taxes so it has created two tax credits for expenses related to higher education: the Hope tax credit, and the lifetime learning credit. There are a lot of rules and restrictions for both. As a general rule, if the total expenses involved are $7,500 or less, Steve suggests in his book that it’s usually better to use the Hope credit if you have a choice. If your expenses are above that amount, Steve suggests in his book that it’s better to use the lifetime learning credit because the lifetime learning credit is larger for expenses over the threshold amount. Also, keep in mind that a parent can only claim the Hope tax credit for their child during the first two years at college.
As for retirement tax credits, there is one designed to benefit people with modest incomes who save for their retirement. There are a lot of restrictions, but the main one to keep in mind is that your adjusted gross income is not more than $50,000 if your filing status is married filing jointly, or $25,000 if your filing status is single.
What about tax credits for businesses? We haven’t touched on those yet? We asked Steve Fishman what are some of the choices for a small business owner.
Stephen Fishman: Right, if you have a business there are few types of activities that Congress views favorably enough to warrant a tax credit. These categories include:
• helping the disadvantaged or disabled
• improving the environment
• helping your employees, or
• investing in research and development.
You may be able to qualify for several different credits at the same time. However, there is an overall limit on total business credits you can take in a year which is based on your tax liability. If you exceed the limit, you can take the credits in future years or apply them to previous years’ taxes—within limits.
Nolo: As Steve reports in his book, one credit most businesses may be able to use is the solar power credit. Businesses can get a credit up to 30% of the cost of buying and installing solar equipment to generate electricity to heat or cool a structure, or to provide solar process heat. Unlike the solar credit for homeowners, there is no dollar limit on this business credit. We asked Steve about some of the business credits a business can get by helping employees?
Steve Fishman: There are a couple of credits you can get if you do some nice things for your employees. One is the credit for employer-provided childcare. This credit is limited to $150,000 each year. The other is a credit for small employer pension startup costs. If you begin a new qualified defined benefit or defined contribution plan (including a 401(k) plan), SIMPLE plan, or simplified employee pension, you can receive a tax credit of 50% of the first $1,000 of qualified startup costs.
It’s probably hard for most listeners to remember all these details. Tax information is not the most riveting subject matter. So we recommend Steve’s book for more details, Lower Taxes in Seven Easy Steps. And on the the IRS is the best place to keep up on tax credits, that’s www.irs.gov.
Wednesday, January 31, 2007
This is our second interview with Craig Venezia, a nationally recognized mortgage expert and the author of Buying a Second Home: Income Getaway Retirement from Nolo. In our previous interview we discussed issues that arose when co-buying a second home. In this interview we’ll focus on several issues involving the financing and the location of a second home.
Nolo: Craig let's start with the location. When making a decision about buying a second home some people buy locally and some people buy in a vacation area while others buy in a location where the house prices may be lower than where they are currently living. Can you give us any suggestions for where to look for a second home?
Craig Venezia: A general rule of thumb for where to buy your second home is to keep it within a two hour's drive away. The benefit of this is that it doesn't take you all weekend to get to your weekend getaway. And you also have to think about not just enjoying your home but also property management and upkeep issues and that's true for investors who are renting out their place full-time, people who are buying a weekend getaway, or the person that's going to be using it as a retirement. One interesting trend that we've been seeing is that a lot of people are actually buying second homes locally, either in the same town or a neighboring town. And what’s interesting about this is a lot of people who are buying for future investment are doing that because they like the town where they live, they know the area, they’ve established family and friend connections. They don’t want to leave the area but they also know that when they retire they don't need this big home so what they're doing is buying in the general area, renting out their places, and then, when they retire, five, ten, fifteen years down the road they will move into their current second home and make it their primary residence.
Nolo: Let's say that you're considering buying a second home in an area that you are not really familiar with what's the best way to start that process?
Craig Venezia: First and foremost I always say pick up the Yellow Pages or go online, find a local real estate agent. They are the ones that knew the towns where you'll be looking. This is particularly true if you're coming to an area where you have less familiarity and that is true too, if you've been to the area but you just vacationed for a week or two and then leave. You want to know the ins and outs of an area. Your best resource is to go to a real estate agent and work with them and learn as much as you can about the area.
Nolo: Okay let's talk about financing. It's often hard for buyers to acquire a first home let alone a second home is there any way to bypass the typical bank loan?
Craig Venezia: There certainly is. I strongly recommend private home loans. This is where the purchaser borrows money from a family member or even a friend, usually at a reduced rate compared to what you would get from a traditional loan. Both parties benefit from this arrangement. The borrower enjoys the flexibility and usually a lower interest rate than that of the traditional bank loan while the lender receives a higher return than a comparable investment such as a stock or bond may yield. Just keep in mind that this financing option is still a business transaction and should be treated that way. You want to have a local real estate attorney draft the loan and mortgage documents while making sure that all parties understand their obligations—for example, your parents can't foreclose on your house just because you were late arriving to their 50th wedding anniversary.
Nolo: Still with so many people struggling to buy a first home it seems like only the wealthy can get into the second home game.
Craig Venezia: It’s a common misconception that only the wealthy can afford to buy second homes. Actually many everyday people with middle incomes are doing it. I've seen beauticians, contractors, middle managers, everyday people you pass in a street, who can afford to buy a second home. You just need to be smart about how you do it. First and foremost you need to create a realistic affordable budget to make sure that you buy within your means. Also consider renting out your place for part of the year to help offset your expenses. Another alternative is. as we mentioned earlier. to do a joint purchase with another buyer or buyers. This works especially well for investment properties or even vacation homes. By lowering your debt burden, you can purchase a home you might not otherwise have been able to afford. It also has the added benefit of saving time and money on property management.
Nolo: Craig in your book you mention that many people are overpaying on their home mortgages. Can you explain that?
Craig Venezia: Mortgages are very a complicated animal and a lot of people wind up taking out mortgages that they honestly don't know what the cost involved is. And one of the key things that I've seen in people that I've talked with is that they could've gotten a better deal on their mortgage, they could've gotten a lower interest rate. If you got an interest rate that's just a quarter percent or half a percent lower, that could be tens of thousands of dollars in savings over the life of your loan. So now the question becomes, well, great how do I get this lower interest rate? Well the first thing you want to do is work with a reputable mortgage broker who's going to be able to be shopping for mortgages on your behalf. They will compare all the mortgage products within the portfolio of the lenders that they work with and come up with the best rate for you. Now keep in mind that ‘lowest interest rate’ doesn't always mean you're paying the lowest amount on your mortgage. And that's what happened with a lot of people who went into ARMS. An ARM is simply an adjustable rate mortgage. They went win for a lower rate which is usually a teaser rate, it starts off at a low rate and then after certain fixed period, it starts to adjust and suddenly that interest rate is significantly higher than if they had been locked into a fixed-rate mortgage. So the point is when you're looking at interest rates, you don’t want to look at just the percent but you want to try to evaluate. Where is this loan going to go over the course of the time I have it? Am I going to be paying the same interest-rate I’m paying ten years from now? I will, if I have a fixed-rate mortgage but if I have an adjustable rate mortgage, I'm probably not going to be paying the same rate and it's probably going to be higher. So what you really want to do is spend some time with the mortgage broker, really look over the different options that are available to you, and don't sign anything unless you fully understand what you're getting into.
Nolo: Craig one thing that surprised me when reading your book is that the owners of some second homes must pay sales tax. Can you explain how that works?
Craig Venezia: Sales-tax really is an issue that comes up with somebody that's renting out their property and renting it out for a short period of time, usually a vacation rental. So you’re renting it out for a week or two weeks at a time. Basically what that means is that there are some cities and some counties that impose sales taxes. And these taxes go by other names. They call them lodging, accommodations, hotel bed, tourist, transient occupancy taxes, a whole slew of names. But the reality is it's a sales tax on the rental income that you are taking in. You'll need to check and possibly register with your state's department of revenue to see if this is an issue that will impact you know depending on where you buy your property.
Nolo: Craig, can the buyer of a second home deduct the interest on the mortgage for that second home as well as deducting it on the main home?
Craig Venezia: Absolutely. As with your primary residence, you can deduct the interest you pay on your mortgage on your second home. And that interest adds up. Over the life of the loan you can pay tens of thousands of dollars in interest on that loan. And all of that interest is tax deductible on your second home.
Nolo: But can you really deduct all of the interest I thought there was a million-dollar limitation?
Craig Venezia: As with the IRS and looking at taxes, it's never quite a black-and-white situation. The reality is most people will in fact be able to deduct the full amount of the interest. Basically what happens is if all the mortgages on your home exceed the fair market value of your home or one million dollars, you may not be able to deduct the full amount of mortgage interest. Also if the equity in your second home is more than $100,000 you may not be able to fully deduct your mortgage interest. Your best bet with any tax situation is to certainly review it with your tax advisor to see what you can and can't deduct. But by and large most of us are not going to have mortgages that are a million dollars on our second homes, so we will be able to deduct the full amount mortgage interest.
Nolo: Craig thanks so much for speaking with us today. You've been listening to Craig Venezia a nationally recognized mortgage expert and the author of Buying a Second Home: Income Getaway Retirement. from Nolo
Saturday, January 20, 2007
We’re speaking with attorney Lisa Guerin, an expert on employment law issues and co-author of the Progressive Discipline Handbook (Nolo).
NOLO: Lisa, Let’s say you “inherit” an employee—for example, from another department—and you discover a discipline problem. You start talking to the employee’s old manager, and find out that the employee’s had the same problem before, but the former manager didn’t do anything about it. If you do decide to discipline the employee, can you discipline for the older incidents, as well?
LISA GUERIN: It’s really not a good idea to discipline for those older incidents, but the reason isn’t really legal, it's more practical. The whole point of progressive discipline is to give employee an opportunity to improve, to tell them what the problem is, and then work out an improvement plan. And you haven't really given this employee the opportunity to know what the problem is, for example, to talk it over with the manager and to try and come up with some way to improve.
NOLO: Lisa, in the book, you talk about “overdocumenting” employee discipline. How is that possible? Shouldn’t you write down everything that happens?
LISA GUERIN: Well, you should write down enough that you'll be able to remember later what happened and that anyone else who's reading your documentation can figure out pretty easily what happened. What you don’t want to do is to nitpick and micromanage. You know, from a practical level, if your employee feels that you’re always looking over their shoulder and marking down everything that they do wrong, they’re going to feel anxious and it’s going to be difficult for them to really improve and feel supported. And on the legal side, if you ever have to use your documentation for example in a courtroom, a jury who sees that kind of your documentation is going to smell a setup. It’s going to look like you were trying to write down everything that the employee was doing wrong so that you would later have an excuse to fire that person. And that's why it's best to, of course, document, and document thoroughly, but just don't go overboard.
NOLO: Lots of employees have attendance problems. Let’s say you have an employee who’s always calling in to say she won’t be in. You tell her that she has to call within the first half hour of when her shift starts. If she doesn’t call you, but it turns out she’s allowed to have the day off because her leave is legally protected—let’s say she has jury duty that day—can you discipline her?
LISA GUERIN: That’s a really great question and the answer actually has two parts. You can’t discipline her for taking the time off. Employees are entitled to take time off for a variety of reasons and jury duty is one of them. An employee can take time off for family and medical leave, or, in a lot of states, an employee can take time off to vote, if they wouldn't otherwise have time. But you can require employees who are taking time off for these reasons that they know about in advance, to follow your regular policies about checking in with a supervisor, or in this example, giving notice. So you could discipline the employee for not following your rules particularly because she must have known that she was going to have to go to jury duty that day.
NOLO: When disciplining employees you advise people not to make promises about the future. What happens if you do? And if you already have made promises, what can you do to undo those promises?
LISA GUERIN: The reason why you shouldn't make promises about the future is that you might have to keep them and you’re really not in a position, right now, to know what's going to happen. For example, if you promise an employee, ‘You know, as long as you can get those numbers up, we’re going to promote you to be a manager,’ and then let's say your company has to have layoffs and the employee is targeted or you have a great candidate, come up that you want to hire for that manager's position. The employee is going to be left wondering why you didn't keep your promise. And in a worst-case scenario that promise could turn into a contract with the employee.
The way it works ordinarily in this country, is that most employees are employed at will. What that means is that they can quit at any time for any reason. And they can also be fired at any time for any reason as long as your reason is not illegal, for example you're not discriminating.
But when you make a promise to an employee, you might potentially undue that at-will right and that means, rather than being able to fire the employee for any reason, you now have to keep your promise that's become a contract. So the employee, in the example that I gave, might be entitled to that managerial position if he or she can get those numbers up and that might not be what your company wants to do when the time comes.
NOLO: If you’re in a situation where you’re about to discipline an employee, and the employee gives you information that makes you think he or she might have a disability, what are the legal implications of going ahead with the discipline?
LISA GUERIN: An employee who has a disability is entitled to a reasonable accommodation and what that means is that your company might have to make changes to the job or the way the job is performed or the equipment the employee uses in order to enable the employee to do the job.
Examples of a reasonable accommodation might be making the workplace wheelchair accessible, for example, or using voice recognition software for an employee who is unable to keystroke or is blind. So if an employee tells you that he or she has a disability, then you have an obligation to start a conversation with that employee about what reasonable accommodations might be possible.
You don’t have that responsibility before you know that the employee has a disability, however. If you’re going to discipline an employee and the employee then says that he or she has a disability, technically you might have the legal right to still discipline the employee and then start your reasonable accommodation conversation.
But, really the best practice is to try and accommodate and set the discipline aside. It's not really fair to discipline someone for something that they can't really help. You know if your employee, for example, has depression and the employee has had a tardiness problem, a problem coming in the morning. And you're going to sit down and discipline that employee and the employee says, “Boy, I’m really sorry that I've been late so much, but I'm taking some medication for my depression and it makes me really groggy first thing in the morning and I've had a lot of trouble getting going.”
Rather than disciplining that employee for coming in late you might want to instead start talking about reasonable accommodations, for example, can you change the employee’s schedule so that he or she comes in later and then works later in the evening and that way you’re really giving the employee a fair shot to perform the job's requirements.
NOLO: Sometimes you hear about situations where managers get sued by employees for things that happen at work. In what kinds of situations are managers going to be personally liable to employees?
LISA GUERIN: There are a couple of ways that that might come up. First of all certain employment laws make managers and supervisors liable if they break the law and probably the one that people have heard of the most is the Family Medical Leave Act and that defines the term employer so broadly that managers can actually be sued for violating that law. So, that's one way.
Another way is if the employee sues for personal-injury. And in the workplace for example the personal injury that might come up is defamation, where typically a former employee says, ‘My manager gave me a bad reference and I'm not getting any new jobs and the manager’s lying about me and bad mouthing me.’ Then the employee can go back and actually sue the manager personally for damages.
NOLO: Why might an employee sue a manager?
LISA GUERIN: There are a few reasons why that might happen. I think often why it happens is that the manager is the person who has been involved with the employee and who has disciplined the employee, who has that personal relationship. And so often the manager is the person that the employee is really angry at. They’re the face of the company when a negative job action happens, when an employee gets fired or disciplined for example.
Another reason why an employee’s lawyer might choose to sue a manager is to put some pressure on the company to settle. They know it's a very unpleasant thing to have the manager in the hot seat and that might add a little bit of leverage there.
And finally, suing a manager personally for technical, legal reasons allows the employee to keep a lawsuit in state court rather than having to go to federal court. And in many states the state court is considered much friendlier to employees so the employee would want to stay in state court if at all possible. And naming an individual manager as well as the company helps the employee do that.
NOLO: When an employee sues the manager, what does that mean in terms of what a manager has to do.?
LISA GUERIN: When an employee sues a manager personally, that means the manager is a defendant in a lawsuit. So from a practical standpoint the first thing the manager should do is get a lawyer. Often, the company will supply a lawyer for the manager, but it also means that the manager is going to have to participate in discovery, which means being deposed, having to testify under oath having to produce documents. They’re going to have to spend a lot of time working with their lawyer to help prepare a defense. Ultimately, they will have to appear in a courtroom and if the company loses the case and the manager loses the case, the employee will have a judgment for damages against the manager and those can really add up in employment lawsuits.
NOLO: Probably the worst part of any manager's job is firing someone one. What are the employer’s legal obligations?
LISA GUERIN: There are certainly a lot of legal issues that come up when you’re firing someone. For example, most importantly, you can't fire someone for an illegal reason, because you're discriminating against them for example, or retaliating against them for exercising their legal rights. And you may also have legal obligations to an employee who was fired, for example, to give them a final paycheck by a certain date, or to offer to continue their health insurance and things like that.
There aren’t any legal requirements in terms of what you have to say. You don't have to use magic words when you’re firing someone. But what you say certainly is important. Studies show that the way employees are treated, particularly when they're fired, is the main thing that determines whether they're going to sue. An employee who feels that the person who fired them was disrespectful or unkind is much more likely to land in a lawyer's office.
So you need to remember when you’re firing someone that even though it's quite unpleasant for you, it's of course much more unpleasant for the employee. That person is losing a job. They are losing their paycheck. They may be heading for financially tough times. They may be headed for emotional issues or family problems. It can really tear you up to lose a job. You need to keep that in mind when you’re firing someone.
So I think the most important thing to do when you're getting ready to fire someone is to make sure you're prepared, to make sure you have good reason to fire them and you know you have your facts straight. And you should think a little bit about what you’re going to say. You have to tell the employee, obviously, that you are firing them. We recommend that you say, ‘Your employment was terminated.’
I think when you are firing someone, the best rule of thumb is to keep it short. You want to tell the employee, what you are there for – in other words, that their employment is terminated—and then you want to move the conversation fairly quickly to what’s going to happen next, talking about practical issues like getting back company property continuing their health insurance benefits, and so forth.
You want to try and not get drawn into an argument about why the employee is being fired. Really there's no point going there at this point. If you've done your homework, you know you're going to fire the employee. So, it’s best is to cut off that kind of conversation and say, ‘I'm sorry you feel that way, but my decision is final,’ and then move fairly quickly into the practical issues.
NOLO: Lisa, thanks much for talking with us today.