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moneywise winter 2003
-end of year planning;
-401k plans for self-employed;
-cancelling your PMI:
-pay down your mortgage;
-primer on home equity loans;
-estate planning observations;
-a few short topics.

END OF YEAR CHECK
It is time to make certain that you have paid enough money to the IRS and to the various state and city tax collectors in order to ensure that you will not be in a penalty situation.

Please take a few moments to check your 2001 tax returns and write down the following amounts: line 58 of the 1040; line 55 of the NYS 201 (if you filed a resident return); line 54 of the NYS 203 (if you filed a non-resident return); and line 42 of the NJ 1040. These were your 2001 taxes.

The easiest way to avoid a penalty for underpayment of taxes is to be certain that the government is holding in 2002 an amount equal to your 2001 taxes. If you had 2001 Adjusted Gross Income of $150,000 or more, you will need to pay 112% of your 2001 taxes to the IRS and 110% to New York.

Another way to avoid a penalty is to have 90% of your actual 2002 tax liability paid by January 15 of 2003. To do this, we will have to make a solid projection (as I have already done with some of you).

Look at your withholding statements or pay stubs. Project your withholding to the end of the year (combine NYC and NYS) and add in any estimates you might be paying. Compare these figures to your actual 2001 taxes. If it appears that you might be in a penalty situation, telephone me before December 31.

I have given you specific instructions for the most common tax forms. If you file returns that I haven't discussed, you should telephone me to review your status.

If you request an extension to file, you must pay or estimate what you owe and send a check with the extension form. You never get an extension to pay late. If you know you can't meet the filing deadline, I'll help you file the proper forms and compute how much money to mail.

If you will be sending in money, telephone me for the proper forms. You should plan on paying state taxes before the end of the year, so we can deduct these payments in 2001. Federal payments are not due until January 15, 2003.

Here are some year-end reminders about withdrawal requirements for IRA and other pension accounts. If you are 70 ½ or older, you needn't take from each of your IRAs. You can figure out how much you'd have to take in total, and then withdraw that amount

from the IRA account you prefer. You start with the December 31 balances for 2001. Divide the balance by your life expectancy. You can use the new table or joint life expectancies tables in IRS Publication 590. A much better approach would be to telephone me before you make any elections. This will avoid making choices that might not be right for you.

If you are still working after age 70 ½, you are not required to withdraw money from your company pension plan. There is no longer a penalty for excess contributions or excess withdrawals for people in this situation.
The rules for withdrawals have been simplified. If you need to know more, telephone me.


THE NEW 401K PLAN FOR THE SELF-EMPLOYED
Self-employed persons with no employees can now take advantage of a provision of a tax law passed in the summer of 2001 that is effective beginning 2002. You can establish what is being called a "self-employed 401K" plan. A SEP or Profit Sharing plan allows you to contribute 20% of your net profit from self-employment. If you earn $200,000 or more, the maximum contribution would be $40,000. If you earn at least $200,000 from self-employment, there is no reason to read further. You are not permitted to contribute more than $40,000 under any circumstances.

If you earn less than $200,000 from self-employment and would like to contribute more than 20% to a pension plan, you now have a new option. If you adopt a "self-employed 401k", you will be able to contribute 20% of your net profit plus up to $11,000 ($12,000 if you are over 50 years of age).
There are two examples of how this can work for you: (1) if your net profit is $140,000 and you are over 50 you could contribute $28,000 to your Profit Sharing plan plus $12,000 into the '401K" component.

(2) If your net profit is $15,000 and you are over 50, you can contribute $3,000 to your Profit Sharing plan plus $12,000 to the '401K" component. When you compute your income tax for the year, the amounts contributed will be deducted from your taxable income.

If you are interested in following up on this, you can get additional information at www.theonline401k.com/schwab or by contacting the company administering your current plans.

CANCELING YOUR PMI
I have written about Private Mortgage Insurance (PMI) before. The reason I am revisiting this topic is because of a new federal law: the Homeowners Protection Act. Under this law, a lender is required to allow you to cancel the PMI if you have a loan that was made after July 29, 1999 and the remaining balance on the mortgage reaches 80 percent of the original value of the property. The lender is required to automatically cancel the PMI if the remaining balance on the mortgage reaches 78 percent of the original value of the property. You should check your current loan balance to the original value to determine if you are entitled to PMI relief and your PMI was not canceled.
The other way to cancel PMI is to prove that the current value of your property is more than 80% of your current loan balance. If you are relying on the current value calculation, you have the burden of proving the value. Generally, the lender will require that you get (at your own expense) an appraisal from a qualified and certified appraiser and that your payment history is good.
The old standby of refinancing your property with a lower interest loan that does not have any PMI is still an option.

WOULDN'T YOU LIKE TO GET A 6-8% GUARANTEED RETURN ON YOUR MONEY?
I was asked what I would recommend as a safe investment in this current environment. I made my usual recommendations: long term CDs, bonds and bond funds, treasury instruments. All of these pay very low returns, but carry some assurance of safety of principal and an expectation that interest would be earned. A day later, I contacted the person asking the questions and told him to forget all that I said. I had a better answer: prepay your mortgage.

I am going to make an attempt to explain my answer, but if you lose interest in the explanation, just do it. Every lender has a mechanism to accept prepayments. If you have no mortgage, you might want to pass this article to a debtor friend before you move onto the next article.

The arithmetic is very simple. If your rate is 6.75%, every equal payment you make on your 30-year (360 month) mortgage is made up two elements: interest and principal. As you make each subsequent payment, the amount of interest paid decreases and the amount of principal paid increases. You can see this relationship for each of the payments by asking the lender for an amortization schedule. If you can't get it from your lender, you can ask me to compute a schedule for you.

Here is an example: If you borrowed $500,000 at 6.75% for 30 years, the first payment of $3,242.99 is composed of a principal payment of $430.49 and an interest payment of $2,812.50. If you send the bank a prepayment of $430.49 before the payment is due, you will not be paying the $2,812.50 on that amount. When you make your first payment, you will actually be sending in payment #2 on the amortization table. You will be finished with the mortgage with 359 payments instead of 360.

If you didn't make the prepayment and instead put the $430.49 in the bank, and the bank was paying 6.75% interest, you would earn exactly $2,812.50 for holding that money in the bank for 30 years. The problem is that you can't find any institution willing to offer you a guarantee of 6.75%.

If you sell your home before the 30 years period and you were prepaying the loan, your smaller payoff balance would reflect the effect of the prepayments. If at some future date you need the money you prepaid, you can always take a home equity loan or refinance.

There is one downside. Since you will be paying less interest, you will be receiving a smaller tax deduction. This is not really an important consideration.
If there is anything about this discussion that appears to be counterintuitive, telephone me. I'll see if I can convince you. If you are pretty certain you can earn more with your saved money than your mortgage rate, good luck!

WOULDN'T YOU LIKE TO GET A 6-8% GUARANTEED RETURN ON YOUR MONEY?
I was asked what I would recommend as a safe investment in this current environment. I made my usual recommendations: long term CDs, bonds and bond funds, treasury instruments. All of these pay very low returns, but carry some assurance of safety of principal and an expectation that interest would be earned. A day later, I contacted the person asking the questions and told him to forget all that I said. I had a better answer: prepay your mortgage.

I am going to make an attempt to explain my answer, but if you lose interest in the explanation, just do it. Every lender has a mechanism to accept prepayments. If you have no mortgage, you might want to pass this article to a debtor friend before you move onto the next article.

The arithmetic is very simple. If your rate is 6.75%, every equal payment you make on your 30-year (360 month) mortgage is made up two elements: interest and principal. As you make each subsequent payment, the amount of interest paid decreases and the amount of principal paid increases. You can see this relationship for each of the payments by asking the lender for an amortization schedule. If you can't get it from your lender, you can ask me to compute a schedule for you.

Here is an example: If you borrowed $500,000 at 6.75% for 30 years, the first payment of $3,242.99 is composed of a principal payment of $430.49 and an interest payment of $2,812.50. If you send the bank a prepayment of $430.49 before the payment is due, you will not be paying the $2,812.50 on that amount. When you make your first payment, you will actually be sending in payment #2 on the amortization table. You will be finished with the mortgage with 359 payments instead of 360.

If you didn't make the prepayment and instead put the $430.49 in the bank, and the bank was paying 6.75% interest, you would earn exactly $2,812.50 for holding that money in the bank for 30 years. The problem is that you can't find any institution willing to offer you a guarantee of 6.75%.

If you sell your home before the 30 years period and you were prepaying the loan, your smaller payoff balance would reflect the effect of the prepayments. If at some future date you need the money you prepaid, you can always take a home equity loan or refinance.

There is one downside. Since you will be paying less interest, you will be receiving a smaller tax deduction. This is not really an important consideration.
If there is anything about this discussion that appears to be counterintuitive, telephone me. I'll see if I can convince you. If you are pretty certain you can earn more with your saved money than your mortgage rate, good luck!


A PRIMER ON HOME EQUITY BORROWING
Many of us who are fortunate enough to own homes worth more than the debt we carry and unfortunate enough to need money to pay for purchases we can't afford with current income or savings go to a lender to borrow on the equity in our homes.

Recently, I have noted that many of my clients are confused about this type of borrowing. As usual, I'll make it all clear.

When a lender allows you to borrow money based on the value of your real estate, you sign a mortgage and a note. This mortgage gives the lender the right to collect a loan in default from the sale of your property. If there is a mortgage on your property when you secure the "home equity" loan, this new loan becomes a second mortgage. The new lender cannot get money from the property until the first mortgage holder gets its money.

The term "home equity" is just a marketing term for a mortgage, usually but not always a second mortgage.

"Home equity" debt comes in two flavors: a loan and a line of credit. A loan is a fixed amount of money that you repay over a definite period of time at a specified interest rate. The monthly payments are the same for each payment until the balance is paid. A line of credit is basically an open-ended loan. If you are approved for a "home equity" line of credit, you will be given a checkbook. When you draw on the loan, you will in effect be creating a loan for that amount of money. You will receive a statement each month showing a minimum payment amount computed based on the formula you agreed to when you signed for the line of credit. Many lines of credit allow you to pay only interest for a number of years. The problem with doing this is that you never reduce the principal. The interest rates on the lines of credit fluctuate based on changes in some published index. A lender may look at the prime rate as determined by the Federal Reserve Board, add 1% and say that is the rate you will pay for a particular month. Usually, the lender agrees that regardless of the index used, the rate will not be higher than some maximum rate, often 15%.

Both types of borrowing allow you to prepay the outstanding balance and reduce the amount you owe.

My suggestion is to take the loan if you know how much you need to borrow. You will know the monthly payment, and it will be locked in for the term of the loan.

If you do not know how much money you will need, use the line of credit. You will create the loan as you write the check. Always try pay more than the maximum, and always pay off some principal each month.

The loan typically comes to you at no cost. There is no closing cost or processing fee. It often has a clause that the line (or loan) must be open for at least one year, or you will incur a fee for closing the account. Fleet bank, for example, charges $250 if the account is closed in the first year.

A loan, like all loans, should be shopped. Compare interest rates; ask about fees and penalty for early closing. Telephone me if you have any questions.
The rules for deducting mortgage interest are rather complex. Generally, you will be able to deduct the interest on up to $100,000 borrowed on your real estate in addition to any first mortgage interest you may be paying. There is no restriction on the use of the borrowed money.

I caution you not to extend payments for a longer period of time than the asset you buy is useful. For example, you should not borrow money to buy a car that you sell after five years and pay for over 20 years.


A PRIMER ON HOME EQUITY BORROWING
Many of us who are fortunate enough to own homes worth more than the debt we carry and unfortunate enough to need money to pay for purchases we can't afford with current income or savings go to a lender to borrow on the equity in our homes.

Recently, I have noted that many of my clients are confused about this type of borrowing. As usual, I'll make it all clear.

When a lender allows you to borrow money based on the value of your real estate, you sign a mortgage and a note. This mortgage gives the lender the right to collect a loan in default from the sale of your property. If there is a mortgage on your property when you secure the "home equity" loan, this new loan becomes a second mortgage. The new lender cannot get money from the property until the first mortgage holder gets its money.

The term "home equity" is just a marketing term for a mortgage, usually but not always a second mortgage.

"Home equity" debt comes in two flavors: a loan and a line of credit. A loan is a fixed amount of money that you repay over a definite period of time at a specified interest rate. The monthly payments are the same for each payment until the balance is paid. A line of credit is basically an open-ended loan. If you are approved for a "home equity" line of credit, you will be given a checkbook. When you draw on the loan, you will in effect be creating a loan for that amount of money. You will receive a statement each month showing a minimum payment amount computed based on the formula you agreed to when you signed for the line of credit. Many lines of credit allow you to pay only interest for a number of years. The problem with doing this is that you never reduce the principal. The interest rates on the lines of credit fluctuate based on changes in some published index. A lender may look at the prime rate as determined by the Federal Reserve Board, add 1% and say that is the rate you will pay for a particular month. Usually, the lender agrees that regardless of the index used, the rate will not be higher than some maximum rate, often 15%.

Both types of borrowing allow you to prepay the outstanding balance and reduce the amount you owe.

My suggestion is to take the loan if you know how much you need to borrow. You will know the monthly payment, and it will be locked in for the term of the loan.

If you do not know how much money you will need, use the line of credit. You will create the loan as you write the check. Always try pay more than the maximum, and always pay off some principal each month.

The loan typically comes to you at no cost. There is no closing cost or processing fee. It often has a clause that the line (or loan) must be open for at least one year, or you will incur a fee for closing the account. Fleet bank, for example, charges $250 if the account is closed in the first year.

A loan, like all loans, should be shopped. Compare interest rates; ask about fees and penalty for early closing. Telephone me if you have any questions.
The rules for deducting mortgage interest are rather complex. Generally, you will be able to deduct the interest on up to $100,000 borrowed on your real estate in addition to any first mortgage interest you may be paying. There is no restriction on the use of the borrowed money.

I caution you not to extend payments for a longer period of time than the asset you buy is useful. For example, you should not borrow money to buy a car that you sell after five years and pay for over 20 years.


TWO ESTATE PLANNING OBSERVATIONS
All of the articles I write in this newsletter come from my experience or my clients' experiences. The following recent experiences are worthy of your consideration:

1) When you decide to give money to a charity in your will, you should consider making the gift a specific dollar amount and not a percentage of your estate. When you give a percentage, the charity has the right (and one might say an obligation) to be sure it is getting what it is due. The only way the charity can be sure is if they ask the Executor for an Accounting of the assets of the estate. I have a client who is trying to settle an estate where the two execu-tors/beneficiaries have no need for an accounting since they are jointly charged with collecting and distributing the assets and they will also be inherit-ing the assets with the exception of the percentage going to two charities. The charities are demanding a formal accounting before the Court so they can be certain they are getting the correct amount. This Accounting is delaying closing the estate and will cost the beneficiaries thousands of dollars (good for the accountants, bad for the beneficiaries). This could have been avoided if the decedent had made specific dollar amount gifts to the charities. However, if there are large changes in the size of your potential estate, you should review your Will to determine that the dollar amount is still appropriate.

2) I recently read an article in The Wall Street Journal about not leaving equal amounts of money to your children. If you want to read this article, telephone or e-mail and ask me to send you a copy. The article reminded me of a situation where a parent (or one of the children) thought that an equal division of assets would not be appropriate. If you are considering a plan like this, I caution you to discuss it with me before you act. In some families, there may be good reasons for such a plan; however, you may not be considering all the issues. Your good intentions may actually create animosity that you had not anticipated because you didn't consider all of the factors in the family equation. It is always a good idea to consult an expert before executing any estate plan.


SHORT TOPICS
-The car of my dreams. You might want to take a look at the new Toyota Prius. It is a hybrid car (runs on either gas or electricity. The car decides which to use.) It is a cute car, goes about 50 miles on a gallon of gas and you get a 10% credit ( a real reduction in your taxes) based on the cost of the car in the year you buy it. Effectively a government rebate.

-Families of WTC victims who have not filed with the Victims Compensation Fund by 12/22/2003 will lose the right to file for money from the fund. If you know anybody who has not filed, please have him or her either contact the fund at the following web site http://www.usdoj.gov/victimcompensation/ or contact me. Anybody entitled to this money should take advantage of it. As I understand it, the claim does not have to be completed and correct; it just needs to be filed.

-Beginning in 2004, self-employed people will be able to deduct 100% of their medical insurance premium from gross in-come. This is up from 70% for 2003. This is what it means in real dollars: if you are paying $8.000 per year, your real tax savings from 2003 to 2004 would be about $675. It will be greater if you file in New York (not New Jersey).

-It looks like the maximum earnings for Social Security will be increasing from $87,000 to $88,000. The rate will remain at 6.2%. If you are earning at least the maximum, your actual Social Security payment will be increased by $62.

-If you will be over 70½, I remind you to be sure to take your required IRA, 401k, 403b, 457, Keogh or SEP distributions before December 31. The only exception is that you can wait until April 1 of the year AFTER you are actually (and ex-actly) 70½. If you do that, you must take a contribution on April 1 and another by 12/31 of that year. Please telephone me if you need some direction. When you call, you will need to give me the December 31,2002 balances of all the ac-counts I listed above. With few exceptions, you must not take money from these accounts until after you are 59½.

-The New York State Department of Taxation issued an Advisory Opinion on December 16, 2002 answering a petition from a retired high school teacher requesting guidance on the inclusion of his TDA distributions in his New York taxable income. The conclusion is that TDA distributions should not be included in New York taxable income. It should get the same treatment as the pension provided by New York City, tax-free in New York and New York City. This is a very good thing. For New York residents, this is a good reason not to move your TDA into an IRA.