Volume 8 Number 3/4

Tax Notes Relief For Affected Taxpayers By Tom Trent, EA

Mortgage rates continue to dip to levels that haven't been seen in more than 40 years. In 2002, homeowners borrowed an estimated $2.3 trillion in mortgages on single-family homes and 2/3 of that amount was for refinancing. With all this "refi-fever," now is a good time to go over the tax-related rules.

Interest paid on loans secured by your main residence or a second home qualify as mortgage interest. This includes second mortgages, lines of credit and home equity credit lines. That's the general rule, but there's more to it than that. Mortgage interest falls into two general categories; equity and acquisition.

Equity interest is deductible on a maximum of $100,000 of debt. It doesn't matter what you use the proceeds for, the interest is tax deductible. Acquisition debt is the amount you borrow to purchase or substantially improve your home and is deductible up to $1 million of debt. When you refi it's important to be mindful that the acquisition debt has probably gone down as payments were made. For example, if you borrowed $500k for 30 years at 6%, at the end of 5 years you would have paid off about 7% of the original principal balance (approximately $34,700). The remaining $465,300 is the remaining acquisition debt. If your new loan balance is more than that, the excess would be subject to the $100k limit on equity debt, unless that amount was used to substantially improve the home. And there are complex tracing rules that determine whether that excess was used to pay for the improvements.

This is just the tip of the iceberg. The mortgage interest deduction rules are complicated. If you're contemplating refinancing your existing mortgage, please consult with us to avoid unpleasant surprises at tax time.

Demystifing Life Insurance < By Niko D'Oyen

The subject of life insurance can often be unpleasant, conjuring up feelings of our own mortality. However, it is and should be viewed as a critical component of financial and estate planning. Realistically, life insurance is merely a form of protecting your heirs from the financial consequences of your death. Insurance, no matter what type, is risk management. In addition to providing income replacement for your loved ones, life insurance proceeds can be used to pay off your debts as well as pay estate taxes, burial and other expenses.

The initial step is to determine your family's needs while examining your financial situation. A typical analysis begins with establishing your household income and determining how many years of that income you wish to replace in the event that the proposed insured individual's income is lost. You would then consider whether or not the surviving spouse would work, the Social Security benefits that might be provided, and any other benefit entitlements the family would receive. Also, consider the value of the assets owned, as these should be taken into account as well.

After you have taken these initial steps you must determine the type of life insurance you need and the time frame of your need. Determining what type of life insurance to buy requires some thought and analysis because the products are complex and there are numerous alternatives to consider. If the time frame is 20 years or less, consider buying guaranteed level premium term insurance. However, if the need is permanent, or if you are unsure of the length of the time that you desire coverage, then you should consider some form of permanent life insurance.

To give you a better grasp of the types of insurance policies that are available, here are some definitions:

Term Life Insurance is pure protection on the insured's life. There is no cash value and the premium cost increases with age. It is not intended to meet a permanent need.

Whole Life Insurance is for permanent coverage until death, the premiums are fixed and are more expensive than term life because you are building up cash value from which you are able to borrow.

Universal Life Insurance is also permanent coverage, combining pure life protection with a cash value that accumulates tax free. Premiums are flexible and the benefits are usually adjustable.

Variable Universal Life Insurance is similar to Universal Life, but the rate of return is based on segregated accounts which range from equities to bonds versus 10-year treasuries and CDs.

Next, determine how you want to manage your life insurance. If you purchase a permanent type of policy with a cash value, you must decide how proactive you want to be in managing the cash values. If you want the insurance company to manage this policy, then a whole life or universal life policy is your best bet. If, on the other hand, you want to take a more active role in the management of the policy, then consider some form of variable life insurance. If you take the investment approach to life insurance and want to be actively involved, then you should also consider whether you want the policy to generate cash values or increase the level of death benefits. You must understand that variable life insurance products contain a greater degree of risk to the policyholders. However, there is also more upside potential.

The decisions regarding life insurance can be complex. At MFAC we are fee-only, so you can be assured that our advice and counsel regarding these products is unbiased.

Heard in the Hall

On October 2 and 3, 2002 Mitch Freedman was a panelist and a speaker at the AICPA ElderCare Conference in Orlando, FL. On December 6, 2002 he attended the CalCPA Personal Financial Planning Committee meeting in Los Angeles. On January 3rd and 4th 2003 Mitch attended the semi-annual All-Star Financial Group Meeting in Scottsdale, AZ. He also attended the National Executive Committee meeting of CPAs Reforming our Profession in Scottsdale, AZ on January 5th 2003. On January 6th through 8th of 2003 he attended the AICPA PFP Technical Conference. On March 14, 2003 Mitch was one of two presenters of the California Jump$tart Coalition's initial "Teach the Teachers" seminar at California State University, Northridge.Accounting Today featured Mitch in an article discussing the expensing of stock options in the October 7-20, 2002 issue. Monster.com featured Mitch in an article about careers in accounting in November 2002. The November 25, 2002 issue of U.S.A. Today and Business Week on the same date featured Mitch in an article entitled "When the Going Gets Tough..." Mitch is a contributing author of Tips from the Top which was published in November 2002. On January 13, 2003 Electronic Accountant featured Mitch in a discussion regarding AICPA management. On March 18, 2003 Electronic Accountant featured Mitch in another article entitled, "CPAs Nominate Expenses Stars Can Legitimately Deduct."