The new law took effect last year and takes the sting out of the interest payments on student loans. Every year, over the loan’s first 60 months, you can deduct a portion of the loan interest. For 1998, the write-off is $1,000. It rises each year until 2001, when it’s capped at $2,500. You get this tax break even if you don’t itemize on your return (use Forms 1040 or 1040A; the deduction isn’t on the 1040EZ). You’re eligible if you were enrolled at least half time in an accredited college or trade school.
There’s some retroactivity here. If you started loan repayments in, say, January 1995, you still get the deduction for 1998 and 1999. Loans to parents for dependent children are covered, too.
Lenders should send both you and the IRS Form 1098-E, showing how much interest you paid on student loans, or PLUS loans to parents. Be prepared to prove your payments on loans from other sources. For interest to be deductible, the loan can’t come from a family member. Nor can it come from a revolving credit account, unless that account is dedicated only to education loans.
I’m 63 and recently retired. I have a tax-deferred Individual Retirement Account as well as a pool of taxable savings, and will have to tap them for about $12,000 a year. Everyone says that I should use my taxable money first and let my tax-deferred money grow. But if I do, I’ll have to take larger withdrawals from my IRA at 70i, which will push part of my income into a higher tax bracket. What should I do? My head hurts just thinking about this.
Wow, my head hurts, too. So I shipped the headache to financial planner Deana Kelly at Evensky, Brown & Katz in Coral Gables, Fla. Many pages of calculations later, she decided that your suspicions were right. Normally, one should spend taxable funds first. But in your case, you’d get more money by using the IRA first. The higher tax you’d pay on future, larger IRA withdrawals is more than you’d gain from the extra few years of tax deferral.
Other retirees should draw a lesson from this. The conventional wisdom on withdrawals isn’t always right. Check your own situation with a planner or accountant before deciding what to do.
We’re residents of Florida, but for the past 20 years spent six months of every year at our home in Vermont. We sold the Vermont house this year. Are we entitled to exempt the profit from tax?
Bad news. You missed your chance, says Mark Luscombe of CCH, Inc., in Riverwoods, Ill. Married couples, filing jointly, can exempt up to $500,000 in profits when they sell their home (up to $250,000 for singles)–but only if it has been their principal residence for two of the past five years. The profits on a second home are taxable.
Your principal home is where you vote and register your car. You could have transferred your residence to Vermont for two years before the sale and still spent half years in Florida, but now it’s too late. Luscombe’s advice to others: when you have two homes, keep your primary residence in the place you’re more apt to sell.
I have an old stock certificate (32 shares) that my broker says was escheated. I wrote to the bank that held the stock, at the address the broker gave me, but my letter was “returned to sender.” Should I just use the stock for wallpaper?
It’s nicer than some of the wallpaper I’ve seen. But never give up on old stock until you’ve tracked it to its lair.
As asset is escheated when it’s turned over to a state’s unclaimed-property office. If it can be found, you’ll get it back. To locate the office, call your state treasurer’s office or check the Web (www.uphlc.org). We checked the Web for unclaimed property in New York, but nothing was listed in your name.
Next, we tried R. M. Smythe & Co., which tracks old securities (cost: $75 a pop; 800-622-1880). Smythe says your company was recapitalized in 1988. Your 32 shares became less than 1 share (at no loss in value). You should have received a check for $200.
I’m self-employed and put $2,000 annually into an IRA. My wife, who gets W-2 income, has an IRA, too. Can we each start one of the new SIMPLE IRAs, where we could save more?
For you, it’s a great idea. The self-employed are allowed to contribute, and tax-deduct, up to $6,000 a year (you decide how much). Under SIMPLE rules, you, as your own employer, have to make an additional, matching contribution of 1 to 3 percent of the money you put in, says Karen Field of KPMG Peat Marwick. If you have employees, you have to set up accounts for them, too. They can contribute whatever they want, up to $6,000. You add the same matching amount that you gave yourself.
If your wife worked for you, she could have a SIMPLE, too. But she works for someone who doesn’t have a retirement plan. SIMPLEs must be set up by employers. So your wife will have to content herself with a regular, $2,000 IRA.
High earners should ask about SEP-IRAs or defined-benefit Keoghs, which allow them to save more than SIMPLEs do. All these plans can be had through banks, brokers or mutual funds.
