American Insurance Newsletters

Over time, mortgage rates often fluctuate up and down. Depending on where rates currently stand, now may or may not be a good time for homeowners to consider refinancing their mortgages. How can you determine whether it makes sense at any given point to refinance your mortgage?

In the past, one common rule of thumb was if the current interest rate was 2% lower than the rate you were paying on your existing mortgage, it made sense to refinance. Today, that general rule still holds true in many cases. However, even if the current rate is less than 2% lower than your existing rate, refinancing may still be appropriate.

Of course, a lower interest rate is not the only reason to refinance. Here is a review of several reasons why refinancing might make sense for you:

• To Move from an Adjustable Rate to a Fixed Rate Mortgage. Many first-time homebuyers may find they have no choice but to go with an adjustable rate mortgage (ARM) because they cannot qualify for a fixed rate loan. If such was the case for you, perhaps your ARM is about to go up. If so, you may be able to “lock in” a lower rate by refinancing with a fixed rate mortgage.
• To Build Equity at a Faster Rate. Perhaps you would like to pay off your mortgage in less than the traditional 30 years. A drop in interest rates may allow you to refinance your 30-year mortgage and replace it with a 20- or 15-year mortgage at a monthly payment that may be close to what you have been paying. This option may be especially attractive to homeowners who are nearing retirement and would like to pay off their mortgages before that time.
• To Replace a Jumbo Mortgage with a Conventional One. The threshold for a jumbo mortgage has steadily increased in the last few years to its current level of $417,000 (and 50% higher in Alaska, Hawaii, and the U.S. Virgin Islands). The difference between a jumbo and a conventional mortgage can be significant—usually .375 of a point or more. If you have a jumbo mortgage, you may be able to refinance and pay down enough to qualify for a conventional mortgage to get the lowest possible rate.
• To Eliminate Private Mortgage Insurance (PMI). PMI, which is required by most lenders if your original down payment was less than 20%, is tacked on to your monthly payment. If the value of your home has increased since you bought it, you may be able to have the PMI removed just by having your house appraised. In any case, you can get rid of the PMI when you refinance if you end up with more than 20% equity in your home.
• To Tap into Your Home’s Equity. If you have other debt or are anticipating new expenses, such as college tuition bills, you may want to refinance for a larger mortgage at a lower interest rate and use the extra cash to pay off the debt or forthcoming tuition bills.
• To Take Advantage of a Lower Interest Rate. The most common reason for refinancing is that the current interest rate is significantly lower than the rate you are paying on your existing fixed rate mortgage. Much depends on variables such as refinancing costs, points, and how long you plan to stay in your home. It is always wise to shop around to make sure you are getting the lowest rate possible and paying the lowest costs. Many lenders now offer “no points, no closing costs” programs.

Deciding when to refinance depends on your personal financial situation and your plans for the future. You may want to do some number crunching in advance to determine how low rates would need to drop for refinancing to make sense for you. Then, you will be ready to make your move if rates decline.

As you manage your taxes with both the near and distant future in mind, one important, constant goal will be to reduce your adjusted gross income (AGI), which equals your gross income (salary, investment earnings, etc.) after your allowable deductions and exemptions. Maximizing your deductions and exemptions, as well as taking advantage of any tax credits available to you, is a great way to start thinking about saving money on your next tax bill.

Credits Vs. Deductions

First things first: How is a tax credit different from a tax deduction? A tax credit reduces your tax dollar for dollar—that is, a $1,000 tax credit actually saves you $1,000 in taxes. By comparison, a tax deduction reduces your taxable income, but it is only worth the percentage equal to your marginal tax bracket. For instance, if you are in the 25% marginal tax bracket, a $1,000 deduction saves you $250 in tax (.25 x $1,000), which is $750 less than the savings with a $1,000 tax credit. The higher your tax bracket, the more a deduction is worth, but a credit is always worth more than a dollar-equivalent deduction.

Tax credits reduce your tax bill, but certain restrictions, such as income limits, may apply. If you have dependent children, you may be eligible to claim a $1,000 child credit (for 2007) for each child under the age of 17. Other family-related credits include the adoption credit and the dependent care tax credit. If you are funding a child’s education, or your own, you may be eligible for the Hope Scholarship Credit or the Lifetime Learning Credit. The Hope Scholarship Credit provides a maximum tax credit of $1,650 in 2007 for college education expenses incurred during a student’s first two years. The Lifetime Learning Credit, which applies to both undergraduate and graduate education costs, could be worth up to $2,000.

All taxpayers may either claim a standard deduction or itemize deductions for personal expenses such as home mortgage interest. Income limits apply to taxpayers who itemize deductions. In general, a taxpayer claims an itemized deduction when the total of qualified deductible expenses exceeds the standard deduction or if the taxpayer does not qualify for the standard deduction. For tax year 2007, the standard deduction is $5,350 for single filers and $10,700 for joint filers.

How is a deduction different from an exemption? Personal and dependent exemptions are reductions in gross income in addition to the standard deduction or itemized deductions. Every taxpayer may claim a personal exemption for him or herself, unless he or she is claimed as a dependent on another taxpayer’s return. A married couple filing a joint return can claim two personal exemptions, one for each spouse. Even if one spouse has no income, that spouse is not considered the “dependent” of the other spouse for tax purposes. Exemptions will decrease for high-income taxpayers with AGIs above a certain phase-out threshold.

Above-the-Line Deductions

Retaining as much of your gross income as possible should be an ongoing objective, not something that happens only at tax time. Above-the-line deductions, if you qualify, reduce your adjusted gross income. They are so named because they are taken on your tax form just above the line where you enter your AGI. Possible deductions include contributions to qualified retirement accounts, student loan interest, alimony, early withdrawal penalties, and moving expenses.

Long-Term Capital Gains and Dividend Reform

As an investor, planning your tax strategy ahead of time can have a significant impact on your tax liabilities, particularly since the Tax Increase Prevention and Reconciliation Act (TIPRA) extends through 2010 significant long-term capital gains and dividend tax relief set up by tax reform in 2003. For investors in the top four income tax brackets, the long-term capital gains rate has been reduced from 20% to 15%. Qualified corporate dividends will also be taxed at 15% instead of the investor’s marginal rate, which prior to 2003 could have been as high as 38.6%.

For investors in the 10% and 15% brackets, a 5% tax rate applies to both long-term capital gains and qualified dividends through 2007, and a 0% rate will apply from 2008–2010. For planning purposes, it is important to note that no changes have been made to the taxation of short-term capital gains, which will continue to be taxed at the investor’s marginal rate.

To prepare an effective tax solution, advance planning is key. After all, April 15th is never too far away, and the sooner you begin planning, the greater your savings opportunities will be. Talk to your tax professional to create strategies that are right for your situation.

W hen planning the division of your assets, you may believe in a policy of “share and share alike.” This is perhaps the easiest method to avoid conflicts and complaints of favoritism. But does equality necessarily equate to fairness? After all, fairness is only relative, especially when one considers factors such as age, talents/skills, interests, needs, and degrees of material success. A more practical approach to the division of assets may be one in which you recognize and compensate for differences in the abilities and needs of your children, even at the risk of producing some conflict. Through your estate plan, you have a chance to provide a measure of fairness that your children may not otherwise have found in their own lives.

To emphasize the point, consider the following scenarios:

1. Disparity in Age: Assume you have two children, ages 22 and 14. Should you split your estate in half, even though your 22-year-old son has been through years of private school education and college and your 14-year-old son has just started high school?
2. Income and Net Worth: Assume your daughter becomes a partner in an investment banking firm and quickly builds up $3 million in assets, while your son becomes a sales manager who earns $30,000 per year. Should you leave your estate in equal parts to your son and daughter?
3. Previous Giving: Assume you have given your 24-year-old daughter $100,000 worth of stock in your business as an inducement for her to work with you. You have not, however, given your 18-year-old daughter a similar gift. Should you divide the assets in your estate on an equal basis?
4. Investments Given to Children: Assume you have given one child stock in Company XYZ that has risen in value to $300,000. You have given another child stock in Company BCD, which has gone bankrupt. How should you then allocate your assets?
   

In all of the above examples, an equal division of property has the potential to create or perpetuate unequal results. This is not to say you cannot choose an unequal result, but it does point out the need for financial and estate planning that leads to reasoned decisions about how you leave your property.

Listen First

Fortunately, there are ways for you to achieve fairer results. Your first step should be to speak with your children. You may choose to speak with each child individually or hold a family conference. (Obviously, you will have to serve as proxy for your very young children.) Help them to verbalize their hopes, dreams, and expectations, as well as their worries, concerns, and frustrations.

By listening first, you may gain valuable insights into how you can divide your estate constructively without causing jealousy and resentment. The decisions may be difficult to make, but in the long run, your family will appreciate your goal of trying to reach an agreement that addresses each child’s individuality.

To best protect yourself against fraudulent charges if your credit or debit card is lost or stolen, call the issuing bank or company immediately to report the loss.

Credit Card Liability

Under federal law, you are liable for only the first $50 of unauthorized charges resulting from the loss or theft of your credit card. However, you are not liable for anything if you notify the card issuer before someone else uses the card.

Debit Card Liability

Liability for unauthorized use of a debit card, such as those used at automatic teller machines (ATMs), depends on when you report the loss. Under federal law, you are liable for only $50 if you notify the bank within two business days after your card is stolen. But, if you don’t act quickly, you are liable for up to $500 withdrawn from your account.

In addition, even the $500 limit expires 61 days after the mailing date of your first bank statement showing the unauthorized withdrawals. Cardholders who do not notify the bank by that point may be liable for all funds withdrawn, including any that hit an overdraft line of credit.

The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Entities or persons distributing this information are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.