Don't pass up retirement tax credit

Hard to believe, but as many as 88% of taxpayers who could benefit from it don't even know about the Saver's Credit.

Officially named the Retirement Savings Contribution Credit, the 10-year-old saver's credit was designed to encourage low- to middle-income workers to save for retirement. But a survey released mid-January by the Transamerica Center for Retirement Studies of 3,598 full- and part-time workers with incomes of less than $50,000 indicates that as few as 12% of those who could benefit from the credit are aware of it (TheStreet Jan. 17).

One possible explanation for low awareness is that tax filers must use Internal Revenue Service (IRS) Forms 1040A, 1040, and 1040NR to claim the credit; it is not available if you file using Form 1040EZ. Thus, lower- to middle-income workers, those most likely to use 1040EZ and eligible for the credit, may miss it or remain unaware of it.

An eligible worker can apply the credit to the first $2,000 of voluntary contributions to a 401(k) or similar employer-sponsored retirement plan or individual retirement account (IRA). There are credits of up to $1,000 for single filers and $2,000 for married couples. The saver's credit is available to workers aged 18 years and older who contributed to a company-sponsored retirement plan or IRA in the past year and are:

• Single or married filing separately, with adjusted gross income (AGI) of up to $27,750 in tax year 2010 or $28,250 in 2011.
• Head of a household with AGI of up to $41,625 in 2010 and $42,375 in 2011.
• Married and filing a joint return with AGI of up to $55,500 in 2010 or $56,500 in 2011.

You may not claim the saver's credit if you're a full-time student or claimed as a dependent on someone else's return.

If you use tax preparation software, look for prompts that refer to the saver's credit, retirement savings contributions credit, or credit for qualified retirement savings contributions. If you work with a professional tax preparer, make sure he or sure is knowledgeable about the credit. And if you prepare your own forms, complete Form 8880 to determine the credit rate and amount; transfer that amount to the appropriate line on Form 1040A, 1040, or 1040NR.

Do falling home prices signal time to buy?

Home prices in many of America's largest cities continue to fall. The recently released Standard & Poor's/Case-Shiller home price index reports average home prices slipped 1.6% in 20 U.S. cities during November. Prices in eight cities sank to their lowest levels since 2006 and 2007 (nytimes.com Jan. 25).

These circumstances could mean it's an excellent time to buy a home. Here are three things to consider before taking the plunge:

1. How do you want to spend your extra money? Once you buy a house, you have to maintain it. You may need money you previously spent on life's little luxuries to repair a leaky roof, fix a broken window, or replace light fixtures.
2. Would you benefit from tax breaks? Owning a home means you can deduct mortgage interest and property taxes you pay throughout the year from your taxes, but you must itemize these on your tax return. You benefit from tax breaks afforded to homeowners only if itemized deductions will be greater than the standard deduction.
3. Can you afford a monthly house payment? The 26/38 rule can help you identify how much house you can afford. A monthly house payment should be less than 26% of your monthly gross income and includes your mortgage, property insurance, and property taxes. Your total monthly debt obligations—including house payment, car loans, and student loans, for example—shouldn't exceed 38% of your monthly gross income. This standard has some wiggle room; talk to your credit union home loan specialist for guidance.

Find a qualified tax preparer

If the thought of preparing your own taxes makes your head spin, you're in good company. The National Taxpayer Advocate office, within the Internal Revenue Service (IRS), reports that 60% of taxpayers pay someone else to prepare their returns (WalletPop.com Jan. 14).

Enlisting the services of a tax preparer can be convenient, but research before deciding which one to trust with your taxes. WalletPop.com offers these suggestions for finding a reliable, qualified tax preparer:

• Go online. Do a search for tax preparers in your area. Check each one's website for information about the preparer's qualifications. Also look for signs that the preparer stays informed about the latest tax issues, perhaps by writing a tax blog or contributing to media stories about taxes.
• Look for complaints. Check with licensing agencies or professional organizations to find out if complaints have been filed against a preparer. If a preparer has a number of complaints on record, you may want to steer clear.
• Ask about compliance. The IRS requires all paid tax preparers to have a Preparer Tax Identification Number (PTIN). Some states also require additional licensing. Ask potential tax preparers if they meet these requirements.
• Consider the cost. You probably can expect to pay between $200 and $500 for a federal return. But fees can vary depending on your location and the complexity of your return. If a preparer's fees differ greatly from others in the area, don't be afraid to ask why.
• Expect good service. Does the preparer return your phone calls, answer your questions, and advise you about which documents you should bring to your appointment? If not, look for someone you feel more comfortable working with.
• Check availability. Find out when the preparer's office is open and how you can get in touch during the off-season, in case there's a problem with your return.
• Get recommendations. Ask family or friends if they can refer you to a preparer. But don't settle for a name alone--ask additional questions about what the preparer does or doesn't do well.

Blowin' in the windfall

This month's $380 million lottery drawing brought worldwide attention to the holders of the two winning tickets. Each time a big lottery jackpot hits the news, you can be forgiven for thinking "That could be me!" and dreaming of a spending spree.

More likely you'll get a less newsworthy windfall--found cash, a year-end bonus, a modest inheritance. But even moderate windfalls can lead to costly mistakes if you're not careful. To ensure that you don't blow any windfalls that come your way, the Credit Union National Association's Center for Personal Finance recommends that you start by getting help from qualified advisers. Follow these tips:

• Pay the Internal Revenue Service first." Consult an expert--accountant, tax attorney, or other tax adviser--to determine your tax liability, if any. (Your state or local bar association might offer referrals to tax attorneys.) Insurance settlements and inheritances might not be tax deductible. If you do owe the government something, immediately set that amount aside before you spend any of the rest.
• Look at the whole picture. Almost as common as news stories about lottery winners are the follow-up articles about sudden millionaires who foolishly let it all slip away. Make no rash decisions. Instead turn to a Certified Financial Planner (CFP) for comprehensive windfall advice. A CFP designation means the planner has passed a rigorous exam and has stayed up to date with continuing education. Let the CFP help you consider all your needs, goals, and options and make the most of your good fortune.
• Give wisely. Windfalls can put recipients in a charitable mood. Get legal advice before giving money to friends and relatives to head off potential tax issues and hard feelings. Check out charitable organizations through evaluators such as Charity Navigator and Give Well to make sure your donations will be put to good use. And reward yourself, too. It's OK to splurge a little. Just be sure you don't jeopardize your long-term goals when you do.
• Keep an even keel. Windfalls can be stressful, especially if they're associated with a death in the family or because of a public event. Excitement, publicity, and the inevitable demands of opportunists and investment swindlers can be bad for your physical and mental health. Before you feel overwhelmed, talk to a trusted personal or family therapist about coping skills.

Your home: Prepare for a tough sell in 2011

If you're planning to sell your house in 2011, it's going to be a tough market.

That's the consensus of a number of analysts predicting that home prices will continue to fall, interest rates will rise in the second half of the year, and the number of sellers will continue to outnumber the number of buyers (seekingalpha.com Jan. 4).

The mortgage market has been so dismal Moody's Analytics suggested last year that in many markets in the U.S. it made more sense to rent than to buy. The cost to rent has gone up a modest 3% the past year and should continue to be moderate.

Some observers, however, say the market may improve by mid-2011 and certainly by the end of 2011. Moody's chief economist Mark Zandi told CNNMoney.com (Jan. 4) that owning a home again will be more advantageous than renting. His reasoning: Home prices will fall more, making ownership more affordable and the oversupply of homes for sale will keep already depressed home prices low. And while mortgage rates will rise in the second half of 2011, they will remain low by historical standards.

While forecasts for the housing market are varied, motivated sellers can succeed with these steps:

• First, get your house ready to sell. Often referred to as staging, and the subject of many television shows, this simply means taking an objective look at the sales appeal of your home. Does it need painting, new carpet, or minor fix ups? Get rid of things that make it your home--photos, for example. Make it as neutral and as uncluttered as possible. Sell to buyers' needs, not yours. Be honest with yourself about its curb appeal.
• Second, decide whether you'll go it alone (FSBO or for sale by owner) or enlist a broker. FSBO means more work on your part, but potentially more money in your pocket. And you'll likely have to fend off numerous calls from brokers hoping to get your listing. Listing with a broker offers greater marketing potential, but you'll be paying commissions to the selling agent and usually a buying agent.
• Third, decide whether you're willing to offer incentives. Even if you go it alone you might want to consider a commission to the successful buyer's agent. Agents are likely to nit pick your house to death if they show it without one. Consider including paying for a home warranty for the first year or two. They typically cover all appliances and the heating and cooling systems, for around $500 or so annually. Or offer to pay a portion of the buyer's closing costs; you can deduct it as a sales cost.
• Finally, be patient. Just try to find someone who can give you an accurate picture of how long it will take to sell a home these days. It all depends on local market conditions.

Three ways to leverage your payroll tax 'raise'

If you have a job and pay into Social Security, you'll get a temporary "raise" in 2011. That's because a 2% decrease in your payroll taxes is part of the Tax Hike Prevention Act Congress signed into law at the end of 2010 (msnbc.com Jan 3).

You won't see this money in a lump sum. Instead, each paycheck will be a tad more because you can expect to pay a little less in taxes. How much? You can get an idea by visiting Kiplinger.com and typing "tax cut calculator" in the search engine.

No matter what size your "raise," if you don't plan how you'll use that money it will slip away. Here are three ways to get power out of that extra cash:

1. Invest in yourself. If you don't have any credit-card debt, put the entire 2% in a pre-tax retirement account or Roth IRA, start laddering certificates of deposit/share certificates (CDs), open a high-yield savings account, or invest in a mutual fund. If you have credit-card debt, use the extra cash to pay it down.
2. Invest in your living situation. Establish an appliance-replacement fund and think "energy-efficient," pay more on your mortgage every month, or put the money aside every paycheck for auto maintenance.
3. Invest in quality of life. Start a fund for gift giving so you can celebrate important occasions and give to charity without worry, add a line to your budget for family entertainment so you're ready when the big show comes to town, stash the money to pay the rising costs of health care, or join a fitness club and invest in your personal health and well-being.

Two of these ideas have bonuses in that you'll get a percentage back if you invest in a pre-tax retirement account or a health savings account. Others save you money by reducing costs: If you pay down credit card debt, pay more on your mortgage, or upgrade an appliance, you'll wind up paying less in interest or the cost of energy. If you invest in a Roth IRA, besides bringing you more money when you retire, your contributions most likely will be cheaper in today's tax climate than they will be in the future.

Find the right fitness equipment

Is your New Year's Resolution to get fit, but your personal economy is shaky? You can lose weight, gain muscle mass, pump up your endorphins, increase flexibility--name your goal--without spending precious time and scarce money at a gym. Learn how to shop for quality new or used fitness equipment--from the simplest to the most complicated--and move your workout into your home (GenXFinance.com Dec. 27).

New equipment is ideal--it comes with a warranty and is an investment. But if your budget says "no," or you aren't sure what you need, it makes sense to purchase used equipment.

Websites can help you figure out what you need and want, get you started on your own exercise program, and even review brand names and models. Then, when you are ready to purchase equipment, you can make an informed decision.

Use key words and phrases to search these sites for ratings, comparisons, reviews, or helpful tips:

• ConsumerSearch.com reports what experts and users say about a product, without being influenced by advertising or other commercial considerations.
• About.com gets its information from real people with passion and expertise in their fields who agree to observe a conflict-of-interest policy.
• E-How.com combines expert with practical knowledge to help you research, share, and discuss solutions and tips for just about anything you want to do.

Examples of key words or phrases: exercise video, treadmill, resistance band, strength training, toning, elliptical machine, fit on a budget, and so forth. You'll find choices for information about the topic you enter, plus leads to new areas of exercise you perhaps hadn't considered.

Before you buy fitness equipment:

• Think about activities you already enjoy. This is important when venturing into something new to increase the likelihood you'll actually use the equipment you buy. For example, if you hate bike riding, don't buy a stationary bike. Start with exercise videos that you rent or borrow from the library and a good pair of shoes to find out what you like.
• Determine your budget. Exercise gear doesn't have to be expensive, but you want good quality. Visit About.com and search "exercise on a budget" for alternatives to spending a lot of money for gym membership or on home equipment.
• How much room do you have? Before you buy anything bigger than resistance bands, think about where you'll put it. Measure your space to avoid future problems.
• Beware of fitness fraud. This includes quick fixes and impossible claims. Example: An ab machine will target your abdominal muscles, but it won't reduce fat over your tummy.