Monthly Archives: May 2017

Municipal Bond Investing Mistakes

Investing in municipal bonds can be a benefit due to the fact that the interest income they provide is generally tax-exempt. In order to realize the full tax benefits of municipal bonds, you have to be careful not to make the following mistakes.

Low Interest Rates: Interest income from municipal bonds is usually much lower than corporate bonds, but since municipal bond interest is generally tax-exempt, your returns may be higher when factoring in taxes. The problem arises when you would have received a greater return by investing in corporate bonds than municipal bonds when factoring in taxes. Generally, if you are in a low tax bracket, then municipal bonds may not make sense.

Purchasing Out of State Bonds: Municipal bonds are not subject to either Federal or state taxes if you purchase bonds from your home state. If you live in a high income tax state, such as California, New York, or New Jersey, then you should consider purchasing a bond from your state to reduce the overall tax exemption.

Alternative Minimum Tax: This dreaded tax, also known as the AMT, may make your tax-exempt municipal bonds taxable. If a bond is considered a private activity bond, then you may end up paying taxes on the bond interest.

You must be careful when selecting municipal bonds by doing your research. Otherwise, in your quest for tax-exempt income, you may end up overpaying taxes or unnecessarily receive a low interest rate.

Don’t Be a Co-Signer Unless You Want to Pay Someone Else’s Debts

Your friend, child, brother, or parent can’t get a mortgage or a car loan so they ask you to be a co-signer. Of course you will be a hero and co-sign for your loved one! But beware of the dangers before doing so.

In reality, the lender is assuming that the odds are fairly high that there will be a default on the loan, otherwise, why would they need someone else to co-sign on the loan? There are certainly many situations that the loan never goes bad, but why take such a chance? Consider this:

If the borrower defaults on the loan, then your credit will take a hit because you are personally responsible for the loan. The lender may also come after you for payments on a loan that you never benefited from. Actually, you had almost all of the risk without any real benefit.

If you are familiar with Murphy’s law, then you know that what can happen will happen. So, what if you are ready to obtain a mortgage or finance a car and then find out that the loan you co-signed went bad? You may not qualify for the loan for yourself or the terms may not be as favorable as they were originally.

One last item to consider is the damage to the relationship once a co-signed loan goes bad. As Polonius said over 400 years ago in Shakespeare’s Hamlet, “Neither a borrower nor a lender be; For loan oft loses both itself and friend . . .” Even thousands of years before Shakespeare numerous bible versus were also written to warn against co-signing such as Proverbs 22:26-27 and Sirach 29:16-18.

Simplify Your Home Office Deduction

The home office deduction is used by both small businesses and employees, which allows a deduction for using part of your home exclusively and regularly for business purposes. This allows a percentage of certain expenses to become tax deductible or at least more tax favorable such as mortgage interest, property taxes, rent, utilities, homeowners insurance, repairs and maintenance, and depreciation. The downside is that it can be both complex and time-consuming when taking this deduction.

The good news is that the you can use a simplified method for deducting home office expenses. This method allows taxpayers to deduct $5 per square foot of business use up to a maximum of 300 square feet for a total deduction of $1,500, as opposed to having to figure out all of your expenses.

Although this new method is simplified, you need to determine if it makes sense to use the simplified form or the traditional method of calculating home office expenses. You also want to make sure that you meet the criteria for having a qualified home office. Additionally, the rules for employees using a home office are more complex and need to be followed strictly.