How much should I budget for annual expense on the general maintenance of my house?
Where most people ‘take it for granted’ until they need to replace the windows at $300/pc or the roof at $10/sqft. And if you retired and most of your money is in your IRAs, now we have to add taxes in top of the cost.
While conducting one of our Retirement Planning classes here locally, one of our students had an interesting question regarding how much he should budget for the general maintenance of his house. This is a question that usually arises when we are putting an income plan together in order to bring a couple successfully through retirement. It also happens when we are putting together an estate plan and the trustees want to set aside money specifically for the upkeep of their home so their beneficiaries don’t have to sell home before they are ready. They understand that at any time you ‘have to’ sell anything, especially a large ticket item, the buyer wants a pretty good deal.
There is a general rule of either 1% of your purchase price (Current Market Value) or about $1 per square foot of living area. The living area should include your basement, attic and garage in this calculation. For example: 2 story Colonial with a two car attached garage and full basement. If your assessed size of your home is 2400 sq. ft. then it is safe to assume you have 1200 sqft on the top floor as well as the main floor and the basement. So realistically, you are looking at a potential 3,600 sq ft of living space. A two car garage is usually about 440 sq ft. So if you add it all up, you have a little over 4,000 sq ft that should go into this calculation and not simply the square footage you originally purchased your home.
So the range in which to implement your budget is anywhere from 1% of the purchase price to $1 of the entire square footage of the home. In our example, assuming homes are selling for $100 sqft, and you bought your home for $240,000. The bottom end of your budget for home maintenance should be $2,400 and the top end would be $1 of the total square feet or $4,000.
Now let’s talk about the $100 per sq ft. If we place this as a par value, we can simply investigate what homes are currently selling for in our neighborhood to see if we are above or below that factor. For instance if we find that a similar 2400 sq ft home just sold for $220,000 then we know immediately that is below par value (22/24 = $91.67 sq ft). We would then budget at either 91.67% (2400*.9167) which is $2,200 or (4000 sqft * 92 cents) which is $3,680. Of course our budget would work the opposite way if we find that our home is currently valued above par. For example a similar home sells for $300,000 or 125% above par so our bottom end of the range is $3,000 while the top end is now $5,000.
So why the difference? How does the market value per square feet have any effect on my maintenance cost? When considering a budget for your home there are Geographic Cost of Living, Quantity and Quality of products and services, and level of outside influences as main contributors in how current market fluctuations effect the day to day maintenance costs of your home. More affluent neighborhood stores sell products at a higher premium compared at lower income neighborhoods. Those same stores have more specialized products versus more generic brands to choose. More affluent stores have better opportunity to buy in bulk compared to lower income demographic stores where premium is placed on smaller packages that fetch a lower investment from the customer. Bigger homes usually have more amenities, landscaping and changes in construction materials that add a higher ongoing maintenance cost.
Other Considerations that will affect your long term budget when you purchased the home:
Age of the house, roof, windows, additions etc
Age of the appliances, hvac, plumbing, electrical
Construction of home, vinyl siding, brick, stone etc
Ongoing maintenance prior to purchase
Proactive Maintenance, protective paints and seals, and waterproofing
Warranties on appliances, maintenance
Topography of home, high ground or valley, windy with no trees or surrounded by trees
City Water or Well
Weather extremes
It doesn’t seem that it should cost that much to maintain a home? You’re right it doesn’t seem to but let’s look at the list:
Age of Life for
Roof – 20 years at about $9/sq ft that is $22,800 ($1140/yr)
Furnace – 15 to 20 years and will cost about $2500 in today’s dollars ($125/yr)
Hot Water Heater – 10 years at about $500 ($50/yr)
Water Softener (if applicable) – 10 to 15 years at about $500 ($35/yr)
Central Air – 20 years at about $4000 ($200/yr)
Sprinkler System 30 years at about $2500 ($85/yr)
Driveway 30 years at about $9000 ($300/yr)
That’s a total of about $1935 in today’s dollars and with the rate of inflation at 2.5%, most of these costs will be quite a bit higher. In 20 years, this monthly maintenance fee will be approximately $3100. While budgeting for the long term maintenance, the day to day maintenance now has a range of approximately $465 and then topped out at $2,065. It’s tuff to take ownership and stick to a budget, especially when there is a chance you may never need it. But as my mother always told me as I scoffed at the umbrella on the way out the door, it is better to have and not need it than to need it and not have it.
Tag: Save Money
Reduce Your College Costs by Great Tax Planning
Saving for your kid’s college can be harder than saving for your retirement. The clock starts ticking the day your child is born and as college draws closer, the less risk you can afford to take. Consider these tax-advantaged tools:
• Coverdell Education Savings Accounts (“ESAs”) let you save up to $2,000 per year per student. Earnings grow tax-deferred, and withdrawals are tax free for education costs.
• Section 529 Plans are state-sponsored college savings plans. Each state sets its own lifetime contribution limit, which ranges between $100,000 and $300,000+. Traditional “prepaid tuition” plans cover specific units of tuition such as a credit hour or course. Newer “college savings” plans invest contributions in mutual funds for potentially higher growth, generally adjusting portfolios from stocks to bonds and cash as your child ages. You can choose any state’s plan; however, some states offer deductions for contributions to their own plans.
• U.S. Savings Bonds let you defer tax on gains until you redeem the bond. Interest on Series EE Savings Bonds issued after 1989 to individuals age 24 or above may be tax-free if you use it the year you redeem the bond for “qualified educational costs” (tuition and fees minus tax-free scholarships, qualified state tuition plan benefits, and costs for which you claim the American Opportunity or Lifetime Learning credit). For 2015, the exclusion phases out for households with “modified AGI” from $77,200-92,200 (singles and heads of households) or $115,750-145,750 (joint filers) and isn’t available for married couples filing separately.
Plan Coverdell ESA Section 529 Plan
Donor AGI Limit $110,000 ($220,000 joint) None
Contribution Limit $2,000 per year $115,000-315,000 lifetime
(varies by state)
Federal Deduction None None
State Deduction None Some
Withdrawals Tax-free for elementary, secondary, and college costs, including reasonable room and board. Expenses paid out of ESA accounts do not qualify for American Opportunity or Lifetime Learning credits. Withdrawals not used for education are taxed as ordinary income. Tax-free for “qualified higher education expenses.” Withdrawals not used for college are taxable only if they exceed contributions.
Age Limit Use by age 30. Otherwise, pay tax on gains or roll into a family member’s ESA. Designate new beneficiary if child chooses not to attend college.
Section 529 plans offer estate-tax breaks in addition to income-tax breaks: Contributions are considered complete gifts for gift tax purposes; you can contribute up to $14,000 per year per student, or $28,000 jointly with your spouse, with no gift tax effect; 5 year accumulation plan states that you can give a beneficiary up to $80,000 in a single year, or $160,000 jointly with your spouse, so long as you give no more for the next four years; plan assets aren’t included in your taxable estate unless you “front-load” contributions in a single year then die before the end of that period.
What’s more is if you lose money in a 529 plan, you can close your account and deduct the loss as a miscellaneous itemized deduction. You can also transfer accounts from one plan to another, but only once a year. If you’re saving for college and you own permanent life insurance, you can deposit savings dollars into your policy and take tax-free cash for college (or anything else for that matter). If you later surrender the policy, any gains exceeding your total premiums are taxed as ordinary income when you surrender the policy (hint you can still get all of your money out while not surrendering the policy).
American Opportunity/Lifetime Learning Credits
These credits are available for parents (if they claim a student as a dependent) or students (if they can’t be claimed as someone else’s dependent). Here are the rules:
College Credits
Credit American Opportunity Lifetime Learning
Eligible Course You, your spouse, or your dependent enrolled at least half-time in the first four years of post-secondary education 1) Any year of postsecondary or graduate education
2) Any course of instruction at an eligible institution to acquire or improve job skills
Eligible Expenses 100% of the first $2,000 in expenses plus 25% of the next $2,000 in expenses; $2,500 maximum per student 20% of the first $10,000 in expenses; $2,000 annual maximum per taxpayer
• You can claim the full American Opportunity credit for as many students as qualify; however, the Lifetime Learning Credit is capped at $2,000 per taxpayer per year.
• The American Opportunity credit phases out as your AGI tops $80,000 ($160,000 for joint filers) (2015). The Lifetime Learning credit phases out as your AGI tops $55,000 ($110,000 joint) (2015).
• You can’t claim credits for expenses you pay out of an Education Savings Account or Section 529 Plan established for that student.
• Married couples filing separately can’t claim the credits.
Give Your Child Appreciated Assets to Pay College Costs
Previously it was possible to give appreciated assets to students age 18 or older before you sold them, to pay college costs. Your child’s tax on those gains would likely be less than yours. And this move kept down your AGI, which preserved your adjustments to income, deductions, and credits. You can give each child up to $14,000 per year ($28,000 per couple) with no gift tax consequence (2015). However, since 2008 the “kiddie tax” rules now apply to full-time students under age 24, thus greatly limiting this strategy.
You can withdraw funds from your IRA or qualified plan for college costs (tuition, room and board, books, and fees) without the usual 10% penalty for withdrawals before age 59½. Tax breaks for parents and students generally phase out as parental AGI rises, and financial aid is based on family income and assets. Emancipating your child severs that financial cord and lets your child qualify for tax breaks and financial aid according to their own income and assets. Your child will have to provide more than half of their own support (from investment and employment income) so that they no longer qualify as your dependent. This, in turn, lets them claim their own personal exemption (which may be phased out on your return anyway).
If dorm life doesn’t suit your scholar, consider buying them off-campus housing. As long as you can trust them not to trash the place, they’ll gain some real-world financial education and responsibility along with their college courses. This offers several tax and financial advantages:
• You can treat it as a second home and deduct mortgage interest and property taxes you pay on Schedule A. Or you can treat it as rental property, charge rent, and report rental income and expenses on Schedule E.
• You can pay your child a management fee and tax-advantaged employee benefits to manage the property.
• You can title the home in your child’s name (or jointly with them) and include them as a co-signer on the mortgage to help build their credit.
• A child who owns and occupies the home for two years can exclude up to $250,000 of gain from their income when they eventually sell.
Traditional tax planning seeks to minimize tax — period. But some tax strategies actually cost you when it comes time to apply for need-based college financial aid. So it’s important to know how your tax choices affect the Free Application for Federal Student Aid (“FAFSA”) that schools use to assess financial need.
All schools use a “federal methodology” to calculate how much federal aid they can disburse. Some schools also use an “institutional methodology” to calculate their own aid. Both methodologies work as follows:
The student’s “assessable income,” minus taxes and an “income protection allowance” times 50%
+ The student’s “assessable assets” times 20%
+ The parents’ “assessable income,” minus taxes and a living allowance times 22% to 47% (depending on income)
+ The parents’ “assessable assets,” minus an “asset protection allowance” (based on the older parent’s age) times 5.6%
= Expected family contribution (“EFC”)
“Cost of attendance” minus EFC equals “financial need.” The key, then, is to minimize assessable income and assets until after the last FAFSA reporting period. Here are key points to consider:
• Assessible assets generally include cash, checking and savings accounts, discretionary securities and investment accounts, and vacation home equity — but not qualified plan or retirement account balances, home equity, or personal assets. Some schools using the “institutional methodology” also include life insurance and annuity cash values, home equity, family farm equity, and siblings’ assets.
• Assessible income includes AGI (adjusted gross income) plus various “untaxed income and benefits” such as:
o earned income and child tax credits
o tax-free interest income
o child support received
o IRA and retirement plan contributions (be careful making contributions before your child enters college, as they are considered “up for grabs” to pay for school)
o untaxed gain on the sale of your primary residence
o gifts of cash (but not property) from friends and relatives (if grandparents or family want to make gifts, consider waiting to until after the student’s last FAFSA is due, or even making gifts after graduation to retire student loans)
o some schools using the “institutional methodology” also include flexible spending and health savings account contributions.
College costs are high enough that even families earning six-figure incomes can qualify for need-based aid. So don’t assume that your income automatically disqualifies you.
College financial aid decisions are based on the previous year’s income and assets — in most cases, with the “base year” starting January 1 of the child’s junior year in high school. This means it’s best to start planning no later than the start of your child’s junior year. FAFSA forms are due annually so long as the student seeks aid.
Assessable income does not include loan proceeds. This rule may make borrowing against life insurance, retirement or investment accounts, or your primary residence an appropriate source of tuition funds.
Do You Really Save Money Doing Your Own Taxes?
I got a call last week from a woman who opened a small company this year. She wanted to know if it was advisable for her to have a professional prepare her income tax return or should she just get all the forms and do it herself or maybe just get a software package off the shelf and get them done that way?
I’m not surprised at the question, I myself had the same question 15 years ago when I first opened my doors. I’m a smart guy, I’m in finances… I can follow instructions and fill these forms out… besides it is only adding and subtracting from there. It’s not like calculating the time value of money…
But come to think of it, there are 75,000 pages of the tax code. And of course, the laws are ever changing especially for those who write their own paycheck or God forbid, have a payroll. Still, entrepreneurs are a smart bunch. They understand income versus expenses and the fact you don’t have to pay taxes on the money you don’t make right? Every year, scores of sole-proprietors list their sales, add up all the business expenses and viola, their tax return is complete!
My momma always told me, if it sounds too easy then you’re not looking hard enough. As a certified tax coach, we focus our long days on the tax code where we take many things into consideration, especially when it comes to start ups and how those expenses are treated, logged and reported. Unless you have spent thousands of hours researching, studying and networking with tax colleagues, you may miss some valuable deductions or worse, set yourself up for an audit. In fact, according to the Treasury Department, a person who prepares their own Schedule is 5 times more likely to get audited.
The IRS has increased its audit enforcement and will be conducting many more correspondence audits than ever before which leads to me to understand that whatever money a business owner may save on the front end make cost a lot more down the road. And isn’t it funny, how those things happen at the most inopportune times? Not that there is ever a good time for an audit, but it seems they always happen at the worst possible time!
Another client of mine who owns quite a few rental properties, has always done his own taxes. He understood that it is a simple process of adding up all of his rental income and subtract out the expenses. But he always seem to be complaining about the amount of taxes he owed, especially because he was taking all of the risk, doing the repairs and collecting rent. I told him unless you know the rules for depreciation, amortization, passive vs active losses, the difference between capital improvements and repairs and a myriad of other laws, he will continually pay too much in income taxes.
A now this year is going be even more fun because of the healthcare law changes that effect all of us. I always hear at holiday parties and family gatherings that they’re simply going to buy a software package for $50 and it will guide them through all of the ins and outs of the tax returns. They are good to a point. Those software packages cannot hold every question, and they certainly do not give guidance as to how to save on taxes going forward. They are simply there to help you put the right number in the right box on the right form. A seasoned certified tax strategist will intuitively ask all the right questions, to get you to the right answers to minimize your overall tax obligation from this year and every year thereafter.
One final thought, what happens if you make a mistake because you interpreted the rules or laws incorrectly? Is your software company going to come and represent you? One thing is simple when it comes to the IRS, not following the rules and the tax laws that are laid out for us may have serious ramifications. It first starts with a letter, then a visit with a friendly IRS agent who is only too happy to let you know how much you still owe the US Treasury. My momma also said, it’s better to avoid a problem than to fix one.
chuckyourtaxes 