Need More 2008 Deductions? How About an IRA?

If you haven't done so, you can still contribute to a traditional IRA for 2008 until April 15, 2009. The maximum amount is $5000 for everyone under 50 and $6000 for people 50 and over to allow them to catch-up.

Tax-deductibility of traditional IRA's are dependent on your total individual or joint income, and/or if you or your spouse is an active participant in your employer's retirement plan (or 401k).

If you cannot deduct your traditional IRA contributions because you made too much money, consider contributing to a Roth IRA. Just remember, you can put money in both traditional and Roth IRA's but the total has to be either $5000 or $6000.

My Version of Bailout -- Homeowner Relief

With all these government bailouts not working, I believe it is time for all of us to put our collective thoughts and our input to start the debates. We need to target the roots of the problem which are troubled mortgages and souring real estate values.

My idea is to help homeowners and financial institutions deal with the crisis. In turn, it is going to help the government avoid huge taxpayer money losses, restore investor confidence and help communities across the US.

I believe the primary means of stemming the crisis is rate reduction (which is a form of loan modification). However, it has to be drastic enough and across the board to make an impact. This is by no means an overnight solution, but rather a long term approach to a problem that took years to develop in the first place.

Who qualifies? No one class of persons is exempt from the crisis, so we should not choose who deserves more help. I believe that any individual/s who owns a primary residence, vacation or second home, and investment property up to 3 homes should be able to take advantage of this program.

The way to do this is to initially assess the current value of the loan. We now need to convert any adjustable mortgages into a fixed loan, 10-year interest only 30-yr fixed amortized (total 40 years) to keep it simple. We now subtract the total loan amount by the assessed value. The individual will pay the regular rate on this first portion of the loan. Any amount over the assessed value will have the rates reduced between 3%-4%. This will result in a much lower payment for the "negative value". This will preserve the individual's credit and give them an incentive to not walk away from this loan. The government's role would be to act as intermediary between the investor (who bought the loan) and the loan servicer. Some kind of law would have to be enacted regarding the non-tax-deductibility of losses from mortgage loans to encourage investors to agree to this program. The government will also act as an insurer reimbursing loan servicers from some losses if the market does not fully recover in 10 years.

Of course there is no such thing as a free lunch. This rate reduction will accrue interest on the back end. Now after 5 years, so that is between years 6 and 10, the lender will have the option to tack on all that accrued interest back into the principal amount of the loan. Hopefully in 5 years time, the market would have recovered and real estate values have appreciated at a decent rate almost equal to or greater than the loan amounts combined. However, if the market value of the home does not reach the total loan value, the lender has an option to forgive the debt portion and ask the government for reimbursement. This forgiven debt is considered income to the individual. They would have to pay taxes on this amount unless they can prove hardship.

What this program is intended to do is to prevent people who can afford to pay their loans from walking away and tarnishing their credit now in the hope of acquiring another piece of real estate in the future at a cheaper price. It would also prevent banks from having to foreclose on homes and adding to the glut of home supply. It would also give investors an incentive to keep investing in this type of investment vehicle because their interests are also protected. Local and state governments will keep functioning because taxes will have to be paid as well. This program should hopefully stabilize the value of real estate which since going through this major correction now appears to be a bargain. If some sort of program like this is enforced, Congress will need to legislate something that would tighten the leash on individuals walking away from their current loans after buying a cheaper property, and fine and/or imprison persons who are proven to be taking part in fraudulent transactions.

Manipulate Your Paycheck to Stretch Your Dollar

Times are tough. We all want an extra dollar here and there. The good news is, we have a tool available for us to do just that.

In your paystub, the section where it says Fed w/h can be changed at any time. By using an IRS form, form W4, you can claim allowances. This means that the higher your allowances, the less taxes you pay now and you end up with a bigger check today. If you can only claim yourself and no one else, the maximum you can claim is 2. But you can put more claims under the other section.

Keep in mind that the more you claim, the less taxes you're paying. At the end of the year, you might end up owing money to the government. This is not entirely bad considering that you, not the government, used your money throughout the year. Just remember that if you are getting a tax refund, the government is giving you back money that you overpaid them, WITHOUT INTEREST. In effect, you have given the government an interest-free loan!

Whatever you do now with the extra money is your business. I'll write next time how you can save money by adjusting your withholding but end up with almost the same exact paycheck.

Of Government Bailouts Etc

Okay, so we hear all these news about bailouts and the like several times a day and I think we are all sick and tired of it. People have become numb to this type of news and just shrug their shoulders and say, "Oh well, what's new." Sad, but unfortunately, true. Where are all the activists and protesters when we need them most? I say, for now at least, put aside every single passion about something and let's all work together in working towards a solution to this problem.

What happened anyway? To sum it all up, a lot of people thought the real estate market would keep going up forever. People bought homes yesterday (not literally), secured by a loan that is 100% (sometimes 103%) of the house value, then a few months later, sell for a profit. They now either keep the profit to buy another one or two homes or upgrade to a bigger house, with an even bigger loan financed 100% by the banks. Eventually, entities (meaning, regular people, investors, businesses) started buying up more than just one property, speculating that the market will keep moving up. When everything finally blew up, the bubble burst and now we're all stuck in the deep mud that we all created during the heavy profit rainfall.

One of the main things that occurred is that the confidence level of the market went down, so the buyers' willingness to pay so much for real estate has deteriorated to a level well below current prices. Basic supply and demand. No more demand, supply will start going up slowly, then sharply. Then the glut of homes available for sale is now stuck in limbo. People now realize that their loans are way more than the house is worth, so they walk away. They walk away and sacrifice their credit that they built for so long.

Now, what would make homeowners and investors stay with the loans? How would you convince someone to keep paying a loan that is negative in value? These are the basic questions that most people forgot to ask when this whole crisis started. They were more concerned about the banks that they (except Sheila Bair, FDIC Chairwoman) forgot that behind these prime and subprime mortagages are people -- people who might be concerned about ruining their credit if they walk away, people who might be concerned how they can afford paying a loan if they lose their job today. If only the government helped homeowners while simultaneously helping banks, we would not be in this mess for so long.

My guess is that the housing market will not begin to recover unless something drastic is done to correct the main problem. Maybe this will start to taper off by 2010 and recovery slowly begins at the end of 2010 or first 2 quarters of 2011. Until then, we should brace ourselves for even worse news to come.