Tag Archives: #financialhealth

I bought a house – what do I deduct?

I recently wrote this letter to a client of mine who purchased a house and wanted to know what to deduct:

Q:  I bought a house – what do I deduct?

A:  “Dear Andrew…

Congratulations on your home purchase.   Your home mortgage interest and property taxes are tax-deductible so you are now going to be able to itemize deductions instead of claiming the standard deduction on your tax return.  You must attach Schedule A to your tax return.  You should go to www.irs.gov and print out Part Five of IRS Publication 17 to familiarize yourself with what is deductible.  Here are the categories of itemized deductions:

Medical Expenses– Most likely your will not qualify for a medical expense deduction because unless you are self-employed (and therefore can deduct health insurance premiums), medical expenses must exceed 10% of your income before they trigger a deduction.  Health insurance premiums paid by your employer with pre-tax dollars or with HAS funds cannot be deducted – only your after-tax out-of-pocket expenses qualify. But save your cancelled checks just in case they add up to enough.

Taxes – This category includes state and local income tax withheld from your paycheck, any amounts you paid the state when you filed your return last year, and any state estimated tax payments made.  You also get to deduct property taxes on your home and the VLF portion of the DMV registration fee on your cars.  Be sure to look on your escrow closing statement to find the amount of pro-rated property tax you were charged when you bought (or sold) your home.  If your taxes are paid by a mortgage impound, deduct the amount paid by the mortgage company to the county, not the amount you paid to the mortgage company.  Unique to some cities in California is a deductible 6.5% ‘utility user tax” on the PG&E bill.   This tax is not a sales tax, but goes to the City so it is deductible.

Interest – Your mortgage interest on your principal and one second residence is deductible here.  There are some limits – if you borrowed more than $1.1 Million to buy your home or you have refinanced your home and taken out more than $100,000 in equity, you may only be able to deduct a portion of your interest.  Points paid to purchase a principal residence are usually deductible in the year of purchase, but points on a re-finance must be deducted ratably over the life of the loan.   Any remaining points on a previous re-finance are written off when you re-finance a second time.  You also may deduct investment interest (like on a margin account) to the extent of your investment income.

Charity – Cash and non-cash contributions to 501(c)(3) organizations are deductible.  Make regular trips to the thrift store to build your deductions.  Check the IRS Publication for record-keeping requirements.

Miscellaneous – This is the catch-all category of itemized deductions.  Included are unreimbursed business and investment expenses, education in your profession, and your tax-preparation fees.   The instructions for Schedule A describe these deductions in detail.   Only expenses in excess of 2% of income generate a deduction, but if you keep good records you will be surprised how easy it is to exceed 2%.   Business expenses for self-employed individuals are claimed elsewhere, but since you are an employee and you work in internet multimedia, you should be able to reasonably deduct some of your home computer expenses, internet access, purchases of software, CDs, and DVDs, and attendance at concerts and movies.   You may also qualify for office-in-home deductions if you maintain the office for the convenience of your employer.

Home Improvements – Alas, except possibly as medical expenses, home improvements are not tax-deductible.  They do, however, add to the basis of your home.  The basis is used to calculate your capital gain when you sell your house.  You are entitled to an exclusion of capital gain up to $250,000 per person provided you meet certain requirements, but anything over that would be subject to tax, so it is best to save your receipts for home improvements until 3 years after you sell your house.


Congratulations on your new tax-deduction.  Now how about some grandchildren?


Love, Dad”

Aerobics for Your Financial Health

You have a healthy relationship with money if you pay all your bills on time, meet savings goals, allow yourself some freedom to spend, and don’t have much anxiety about financial issues. If this isn’t you, here are some exercises you can do to strengthen your MONEY MUSCLES:

Keep Track.

At least for the next week, write down every penny you receive or spend. Be very specific. Do not try to change your spending habits in any way, just record the facts. Include what you spend in cash and by check. If you use a credit card, record the charges and payments you make to the credit card company. At the end of the week, add up the total money in and the total money out. Make up meaningful categories for your spending and total each category. Then go through the items you spent money on and ask yourself the following questions: Was this item really necessary? Did I receive value for my money? What was my state of mind when I bought this? Is this purchase in alignment with my life’s purpose? How would it feel if other people found out what I bought?

When I did this exercise, I discovered a number of interesting things about myself. Just the act of having to remember how I spent my money created changes in my behavior. I found myself paying more attention to prices and values, and looking for alternatives. For example, if I were at a restaurant, I would think twice before just ordering my favorites off the menu. A few times, I realized I wasn’t very hungry and just settled for a salad or bowl of soup. Knowing that I was going to have to write down how much I spent on wine or cocktails, encouraged me to choose water when I was thirsty.

In the bookstore, I started thinking about which books I really needed to buy for reference versus which books I could borrow from the library or a friend. Sometimes I even sat in the bookstore and read a book instead of buying it. For certain items that I bought, I felt pleased, satisfied, and proud. For other items, I felt ashamed and stupid. I even found myself wanting to lie about what I bought. But I would just be lying to myself. What’s that all about? I first tried this exercise in November of 1998 and am still doing it. It is still effective. It’s become a life-altering, useful, positive habit.

Write down your net worth and financial goals.

If you don’t have any goals, it’s a sure thing that you won’t accomplish them. List all your assets at their current fair market value. Then list all your liabilities (debts) at their current pay-off. You can then calculate your net worth by subtracting your liability total from your asset total. Then prepare a worksheet that projects your assets, liabilities, and net worth over the next 10, 20, and 30 years.

Don’t be conservative, be bold. If your IRA is worth $50,000 now, project that you will have $500,000 in 10 years. Project your net worth into the millions. Put the worksheet away in a safe place and check your progress at 10-year intervals. Re-write the projection if necessary. Once your plan has been written, the Universe just might provide it to you.

Practice abundance every day.

I used to hate sitting down and paying my bills, especially having to write out exact amounts like sixty-three dollars and eighteen/hundreds. Try this abundance exercise: Pay all your bills on the day they arrive and overpay by doubling or tripling the amount due and rounding to the next whole $10 or $100 dollars. You will save time by only handling the bill once, the check will be easier to write, and you will get a real burst of energy next month when the statement arrives and you have a credit balance. The additional energy will more than make up for the small amount of interest you forego, and you won’t have to worry about ever losing a bill, being charged a late penalty, or not having enough money when the bill is due. You can even go on vacation for a month without worrying about your bills – because they are all paid in advance!

Begin a practice of tithing.

Historically this meant contributing 10% of your income to a religious organization. This tradition began when the church and not the government administered all social welfare programs. Now we have Social Security and Medicare, to which each of us already “donates” from 7.65% to 15.3% of our income (depending on whether we are an employee or self-employed). Since so much of our income is already going to these organizations, perhaps an additional 5% would be more appropriate for additional tithing. If you agree, then at the end of each month, calculate your total income and multiply it by .05. The result is the amount you should contribute by the end of the following month to the cause(s) of your choice. Whether you choose a religious or other not-for-profit organization, just make sure it reflects your values. I prefer to tithe to a local not-for-profit organization where one of my friends is actively involved. That way I support both the cause and the friendship, and the effects of my tithing are felt in my local community.

Disclaimer: These are not my ideas. I stole them from some of the wisest philosophers, economists, and psychologists of all time. They represent the wisdom of the ages. They lead to personal growth and may be habit-forming. Do not use these practices if you do not want to make amazing changes in your life.

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