If you haven’t, read on.  It just might be the best thing since sliced bread, and I’m not kidding.

Heck, even if you have heard about it, read on.  You might find it explained here in a better way that you have before, and that would mean I’ve done my good deed for the day.

First, what’s the difference?  That sets the stage for why this is such a great idea!

Both the traditional company 401(k) and a Traditional IRA work essentially the same way.  In the case of a traditional company 401(k), whatever you contribute to the plan (and there are legal limits) is taken away from your GROSS INCOME (top line of your 1040 form).

In the case of a Traditional IRA, you are responsible for claiming the deduction if you’re allowed to take it (line 32 of the 2009 1040 form).  In either case, your ADJUSTED GROSS INCOME (AGI) is reduced – that’s the bottom line of the front page of your 1040 form, and that means that you owe less in taxes…..that year.

The downside?  You’ll pay those taxes eventually, as ordinary income, in the year in which you withdraw the money.  If you withdraw before age 59 1/2 , you’ll probably have penalties to pay as well, unless you’re withdrawing to meet one of a handful of hardship reasons.  That’s okay, though, I mean, you earned the money, and you pay the tax.  This is what we call DEFERRING the tax until later, and that works out really well from a math standpoint.  (Unless taxes go way, way up later, too.)

Now, in the case of the Roth IRA, the EXACT OPPOSITE is true.

You get absolutely no benefit at all this year from contributing to a Roth.  None.  Nada.  You pay the tax now for crying out loud.  Oh, but wait, that means….yep, you don’t pay any tax later.  Ever.  Now, that’s really cool, especially if tax rates do go up.

The next part of this is that, if it makes sense and you choose to do it, you can CONVERT your old company’s 401(k) and any existing Traditional IRAs into Roth IRAs, and, no surprise if you’ve been following along, not pay any tax on the new Roth IRA balances in the future.  Of course, the tradeoff is, as above, that you have to pay the tax NOW in order to make the conversion.

Now, that’s always been true since the Roth was invented, so what’s so cool about 2010?

In 2010, you don’t have to pay the tax.

Huh?  Well, okay, you DO still owe the tax, but, you DON’T pay it in 2010 like you normally would.  For this year (and who knows what Congress will do tomorrow) but as of this writing, for this year ONLY, you get to do the following:

Pay ½ of the tax due in 2010 as if you earned it in the tax year 2011 (by April 2012) and,

Pay ½ of the tax due in 2010 as if you earned it in the tax year 2012 (by April 2013).

This is HUGE.  You might have it already covered by a refund or other deductions, and where you would normally have to worry that you couldn’t pay it, that worry is gone, for this year only.

Your situation is not going to be exactly the same as that of your friend or relative, so don’t do what they say.  Even if they’re really smart, they’re not you.  Talk to me, and we’ll figure out together what makes the best sense.

Want to know more?  Let’s talk, and create a plan that’s right for you and your family.

Visit:  http://whattoinvestinnow.com

Email: John@financialideasblog.com

Technorati Tags: 401K, Compound interest calculator, Convert My IRA, how to invest, IRA Conversion, Retirement, Roth IRA, Rule of 72, traditional IRA, young investors

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Lots of people are asking this question lately. I thought it would be a good time to clarify what I said a few weeks ago about not looking at your primary residence as an investment. Some people thought I meant they should just continue to rent their living space instead of buying it. That couldn’t be further from the truth, so let me explain in more detail.

When you buy a house, you are admittedly taking on a huge responsibility, but one which can pay off handsomely down the road. My parents bought a house in 1964 and took out a 30-year fixed mortgage. The monthly cost of that mortgage was pretty tough for them to swallow in 1964, but in 1984, when they were still paying $296.00 per month, it was a pretty sweet deal!

The logical conclusion from that is to buy as much house as possible, but don’t overbuy. Doing that is part of what got us into the huge mess we’re seeing right now, with record foreclosures. Don’t be afraid of that happening, but also don’t forget that “huge responsibility” part. Buy what you can afford – you can always trade up later when the time is right.

Now, what was I saying about that not being an investment? Just remember, even though it is likely to go up in value over time, that money is tied up unless and until you sell the house, but if you do that, you have to buy something else or rent, because you still need a place to live. The other important consideration is that if you live there for five, ten or more years, you will probably have to replace carpet, paint, perhaps some appliances, maybe even the roof! That’s not money being paid TO you, which is what an investment is supposed to do.

Contrast that with a rental house, where, for example, you might pay $1000 per month for the mortgage, taxes and insurance, and rent it out for $1200. That’s $200 per month INTO your pocket, which is what a good investment is all about.

So, bottom line, buy a house if you can, because the alternative is to pay rent, which is exactly the same thing as paying someone else’s mortgage for them. Just don’t buy more than you can afford and put the rest into real investments, both in the stock and bond markets as well as in real estate.

Contact me if you’d like a professional to help you with doing that!

John@financialideasblog.com

1.888.379.4352  Extension 1000

Technorati Tags: Buying a home, Debt consolidation, Home buyer, Invest in a home, Invest young, real estate investing, what to invest in now

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Finally, an easy question!  I wish I could say that the answer was just as easy to take, but it’s not, because college costs continue to go through the roof.
When I do a forecast for anyone saving for college, whether it’s for themselves later on or for their children or grandchildren, I forecast the college tuition inflation rate to be no less than 7%, which is twice the average inflation rate for the rest of the economy.

So, the biggest and hardest part to get through is going to be how much you might have to save and how early you might have to start.

In my neighborhood, there are dozens of young families pushing around baby strollers.  When I ask them about their college savings, they let me know it’s really early and they don’t need to start yet.  If only that were true.

Right now, a typical in-state school cost for the state of Washington right now is about $14,600 per year, for tuition, room, board, books and lab fees.
If you have a new child this year who will be starting in the fall of 2027, the cost then is closer to $54,000 per year.  Other states are more expensive even for state schools.

We’ll do a specific plan for you when we start working together, but just take away from this discussion that it isn’t something to put off!

What’s the next thing to consider?

What it costs to get the money back out, to actually pay for tuition and the other fees of course!  With a state-sponsored 529 plan, you can get your money back out to pay the bills as you need to with, get this, absolutely no federal income tax at all!

Even more, you don’t have to live in the state where the plan is based.  “What do you mean, where the plan is based?”  Every state has to sponsor at least one plan, and in most cases, they partner with one or more mutual fund companies to actually provide the 529 plan structure and the underlying investments.

So, for example, you could live in California and save in the Virginia plan, or the New Jersey plan or the Arizona plan.  In some cases, you can get a state tax benefit by using your own state’s plan, but that isn’t necessarily the only deciding factor.

OK, so what happens if Junior doesn’t go to college?  It’s fine.  The state 529 plans I work with are accepted by any institution which accepts U.S. Federal Financial Aid.  So, if Junior wants to be a pilot or a chef or a professional golfer, the funds are still there.

If Junior gets a scholarship, you can withdraw a matching amount from the 529 and re-use it for your own purposes.  If he doesn’t use it for undergraduate school, it’s good for 30 years after high school graduation, so he could use it for a Master’s program or a Doctoral program.

And if there’s money left over when all is said and done?
You can change the beneficiary of the plan to a sibling, or grandkids, or even to yourself, and use the remaining funds that way.

If you would like to discuss college investing ideas and opportunities please email me at John@financialideasblog.com.

Technorati Tags: Financial Ideas, how to invest, Invest in college, Invest young, start investing, Stock Market Education, What to Invest In, young investors

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The stock market dropped after last week’s unemployment report for one reason, and one reason only.  That reason is short-term investors.

We’re not talking about the proverbial day traders here, but ordinary people with ordinary fears and concerns who are not able to distance themselves emotionally far enough from their money to do serious investing.  We’re talking about most people.

We’re not just talking about unemployment reports.  We’re talking about any economic “news”, such as housing starts, manufacturing orders, foreclosures, mortgage rates, trade deficits, and a few dozen other factors which can be interpreted to mean different things by different people.  Primarily though, we’re comparing what actually happens with what “experts” forecast.  Even though we’ve seen a marked decrease in the number of new jobless claims, the unemployment numbers last week were a tiny bit higher than what was forecast.

This is not unlike the famous, or infamous, “guidance” which many companies offer as to how much money they will earn per share of their stock.  For example, a company might say they’ll earn $1.00 per share, and various analysts will agree or disagree with that, some higher and some lower.  Short-term investors effectively then make bets on who’s right, and of course, not everyone is. Bottom line, once per quarter these public companies have to formally report what actually happened, and the official results are either “beat”, “in-line” or “missed”.   Beat means they earned more than the consensus of what all the analysts said.  In-line means they met expectations but did not exceed them.  Missed means they made less than forecast.

The economic reports, like the unemployment report, produce a similar reaction to the earnings reports.

If they “beat”, the stock could go way up, unless the experts think that there’s some good news that caused that which everyone already knows, in which case the stock price stays the same, or might even go down a little because the high expectations weren’t met.

If they “miss”, the stock is almost sure to drop, and maybe to drop hard.  The irony of that is that the company might be doing very well, even making a good chunk of change, but not the amount that was “forecast”. For this reason, some companies have recently decided to not play the “guida

nce” game anymore, and I can’t blame them.

So, why don’t you need to worry about all this?

Because, if you’re listening, you’re realizing that the way to success is to be a long-term investor, someone who buys good-quality companies at fair prices, and doesn’t sell them until they’re at the top, or maybe not even then if they don’t need the money.

Bottom line?

Figure out what to pay attention to, and what to ignore.

That’s where I come in, to provide guidance along those lines, help you define your goals and keep you focused on doing the right thing for yourself and the ones you love.  Is that okay with you?

If you would like to discuss investment ideas and opportunities please email me at John@financialideasblog.com.

Please read more about me @ http://www.whattoinvestinnow.com

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A true investor is actually taking a very calculated, well-researched and probably even mostly safe although not guaranteed position that owning a piece of a company, or piece of a group of companies, or maybe even a piece of the debt that a company or a government owes, will pay that investor enough of a return to warrant the associated risk that comes with making that move.

On the other hand, “Playing The Market” is the same thing as gambling, whether it be on high-risk stocks that could go through the roof, or on horses or at the casino or the lottery, where in order, your chances of profiting go downhill and fast.  (I once had a professor in college tell my class that we each individually had a better chance of being randomly chosen to be a U.S. Senator than we had of winning the Super Lotto Jackpot!).

So then, is trading stocks something a novice should get into?  I’d argue you could ask the same question of someone who’d been doing it for many years.  The answer in both cases is a resounding “NO” unless you don’t have anything else to do.  The idea of not working and instead being a “day trader” works for fewer than 20% of those who try it, and the successful ones don’t have time to go to the bathroom.  If that’s the life you want, so be it, but most people are really good at something else, and if they’re really lucky, they also like doing that something else.  In my opinion, they should do that thing, whatever it is.

I happen to like investing, not for anything even remotely like day trading, but because of the bigger picture of using what I know to help others get to their goals – there’s a lot of satisfaction in that, at least for me.  That’s why I do it.

Another thing I hear from a few people is that since they either own their own business or are above average in their corporate career, or even that they’re in a very intellectually demanding job, that it only makes sense that they are smart enough to do their own investing.  That almost makes sense, until you consider once again that good investing takes time and patience, which is not what makes people like that successful in their day job.  Good investing also requires separating yourself from all emotion, and none of us are very good at not being emotional about our money.

The bottom line is that you need a coach, a mentor, an emotionally uninvolved professional who can take a step back and help you see the big picture for yourself, help you define your goals, and help you reach them.  This you can do by being involved in things like the stock market, while at the same time not “playing the market”. If you would like to have a further conversation regarding this please leave your name and email address above, or visit http://www.whattoinvestinnow.com/.

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Learning the Rule of 72

Before we go there, I think the first question here really is: “Why should I even invest at all?” The underlying answer that most of us have to that question, even if we don’t say it, is: “That’s too risky. I know people who have lost everything doing that.  I’m not that dumb, I’ll just save in a savings account.”

Learning the Rule of 72

So the first answer to educating yourself is to ask yourself: “Do I know what the Rule Of 72 is?” and “How does it affect me, anyway?”

What Is The Rule Of 72?

The Rule Of 72 goes back at least many hundreds of years.  Luca Pacioli, an Italian mathematician, referenced it sometime during the 15th century as a convenient way to determine how long it takes your money to double, assuming you know the interest rate it earns. Luca didn’t explain the rule much, meaning it probably goes back even further than that, but the principle still holds true today.

Here’s an example:  start with any amount of money; let’s say $100.00 to be simple.  You invest it at 10%.  Using the simplest of math, you take 72 and divide it by 10, and you get the number 7.2, which means your money will double to $200.00 in 7.2 years.
If you have $100.00 and you invest in at 7.2%, you take 72 and divide it by 7.2, and you get the number 10, which means your money will double to $200.00 in 10 years.

The same exact principle is true if you start with $100.00 or $100,000.00.  That’s all the harder it is.

Now, is it accurate? Well, not precisely.  The Rule Of 72 is a good general estimation if you assume that your interest compounds once per year, when actually it might compound monthly or daily – but if it does, that’s only to your benefit.  There are financial calculators which are much more accurate, but this is a simple idea that gives you a good general working answer.
How Does It Affect Me, Anyway?

Let’s assume you really are thinking like our hypothetical person at the start of this article, and you “know better” than to get into the stock market, so you just dump some money every month into a savings account.  Don’t get comfortable with the idea that you’re better off than people who don’t save at all – you are, but is it enough?  Let’s see.

So you’re in savings account that, in today’s market, probably pays you somewhere between 0.2% if you’re like most people and maybe 3%, if you’ve got a lot of assets and your mortgage there, too.  If you’re in the latter of those two groups and earning 3%, then we take 72 and divide it by 3, and we get….ouch, 24 years for your money to double.

If you’re in the former group and earning 0.2%, well, you’re looking at having your money still double all right, and in only 3,600 years!
Cool, huh?
If you have any personally driven questions or concerns please leave your name and email above or visit: http://www.whattoinvestinnow.com.

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WASHINGTON (Reuters) – The Federal Reserve on Wednesday upgraded its assessment of the U.S. economy, saying growth had returned after a deep recession, while reiterating its promise to hold interest rates very low for a long time.

The Fed also said it would slow its purchases of mortgage debt to extend that program’s life until the end of March, in a move toward withdrawing the central bank’s extraordinary support for the economy and markets during the contraction.

The U.S. central bank, as widely expected, held its benchmark overnight lending rates at close to zero percent.

“Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn,” the Fed said in a statement after its two-day policy meeting.

“Conditions in financial markets have improved further and activity in the housing sector has increased,” it said.

U.S. government bond yields ended lower on the news that the central bank had reiterated a pledge to keep rates ultra-low for an extended period.

“I think it confirms that the economy still needs a little bit of help and that rates aren’t going to go up anytime soon,” said Alan Lancz at Alan B. Lancz & Associates in Toledo, Ohio.

But a stock market rally fizzled on concerns the Fed was setting the stage for pulling back from its efforts to stimulate the economy. The Dow Jones industrial average ended down 81.77 points or 0.83 percent at 9,748.10.

“There’s still a lot of problems with mortgages, the hou

sing market in general as well as the banking sector,” said Dan Faretta, a market strategist at Lind-Waldock, a brokerage firm, in Chicago.

The Fed said it would gradually slow the pace of its purchases of mortgage-related debt in order to promote a smooth transition in markets as the Fed has been the biggest buyer.

But it made clear it would purchase the full amount of $1.25 trillion in agency mortgage-backed securities. In its August statement the Fed had said it would buy “up to” that amount, but dropped those two words on Wednesday.

At least one member of the Fed’s policy-setting committee had proposed curtailing mortgage-backed securities purchases, saying they provide too much of a boost as recovery takes off.

The Fed doubled the size of its balance sheet to more than $2 trillion as it flooded financial markets with money during the crisis last year.
Some policy-makers worry the bloated balance sheet risks triggering inflation if the Fed waits too long before removing its stimulus measures and raising interest rates.
However, the U.S. central bank on Wednesday played down concerns about price pressures in an economy where the jobless rate is at a 26-year high and factory capacity is greatly underutilized.

Policy-makers said inflation would remain subdued for some time with substantial slack in the economy dampening cost pressures, and with long-term inflation expectations stable.

In August the Fed had noted rises in energy and commodity prices, but dropped that reference this week, suggesting that worries about inflation had diminished.

The Fed has maintained its support for the economy, even after cutting interest rates to near zero, through a campaign to buy $300 billion of longer-dated U.S. government bonds and $1.45 trillion of mortgage-related debt, in order to keep lending rates low.

The Fed opted in August to taper down the U.S. Treasury debt purchases by the end of October, and had been expected to opt for a similar gradual withdrawal for its mortgage debt buying which initially had been scheduled to close at year-end.

The U.S. central bank must walk a delicate path between acknowledging the recovery evident in the economy, and assuring investors that it remains attuned to the risks of a double dip recession as policy stimulus fades next year.

This means exiting in time from aggressive steps aimed at boosting growth to avoid igniting inflation as the economy picks up steam, while not smothering the recovery in the process.

Recent data has pointed to turnarounds in manufacturing, housing markets and consumer sentiment, and many analysts expect strong growth in the third quarter after four quarters of contraction. However, with unemployment at a 26-year high of 9.7 percent, most analysts nevertheless expect consumer spending to remain weak and damp the recovery.

Reporting by: Alister Bull, Mark Felsenthal, David Lawder and Ellis Mnyandu and Ryan Vlastelica in New York; Editing by Simon Denyer
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Youngsters wanting to make blizzards of money got valuable advice from financier Warren Buffett who was visiting his local Dairy Queen for the launch of the new Girl Scouts Thin Mint Blizzard.

Surrounded by a group of Girl Scouts in his hometown of Omaha, Buffett offered this tip for college students: “The biggest suggestion I have is to avoid credit cards. Interest rates are very high on credit cards. Sometimes they are 18 percent. Sometimes they are 20 percent. If I borrowed money at 18 or 20 percent, I’d be broke. . . . So if I had one piece of advice for young people generally it would be to just avoid credit cards,” he said.

And what advice does Buffett have for a new investor? “I would do a lot of reading before I invested,” he replied. “In other words I would prepare for it. I wouldn’t jump in the water until I know how to swim. . . .I read every book the Omaha Public Library had about investing by the time I was 11.”

On qualities Buffett looks for in employees? “The biggest thing I look for is if they have a passion for whatever they are going to do,” he said.

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Take on the Street: What Wall Street and Corporate America Don’t Want You to Know. What you can do to fight back

by Arthur Levitt

The Securities and Exchange Commission’s longest-serving chairman, supervised stock markets during the late 1990s dot-com boom. As working Americans poured billions into stocks and mutual funds, corporate America devised increasingly opaque strategies for hoarding most of the proceeds. Levitt reveals their tactics in plain language, then spells out how to intelligently invest in mutual funds and the stock market. His advice is aimed squarely at small, individual investors, as he explains how to look for clues of malfeasance in annual reports, understand press releases and draw more from reliable sources.

The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns

by John C. Bogle

Filled with in-depth insights and practical advice, The Little Book of Common Sense Investing will show you how to incorporate this proven investment strategy into your portfolio. It will also change the very way you think about investing. Successful investing is not easy. (It requires discipline and patience.) But it is simple. For it’s all about common sense.

Speculative Contagion: An Antidote for Speculative Epidemics

by Frank Martin

Speculative Contagion is an insider’s riveting real-time and real-money account of the inflating Bubble, accented with the genuine suspense to be found only in real-life drama. The epidemic of tech-driven lunacy gradually affected more and more feverish investors all too prone to be infected by the insidious absurdity of the times. In the midst of it all, Frank Martin found sanctuary in the treasure trove of history.

Benjamin Graham on Value Investing: Lessons from the Dean of Wall Street

by Janet Lowe

In this book, Janet Lowe presents a brief but interesting biography of value investor Benjamin Graham. The book also provides a nice overview of the history and theories behind  modern value investing.

The Theory of Investment Value
by John Burr Williams

Though the book was first printed in 1938, it is still the most authoritative work on how to value financial assets. As Peter Bernstein has commented: “Williams combined original theoretical concepts with enlightening and entertaining commentary based on his own experiences in the rough-and-tumble world of investment.” Williams’ discovery was to project an estimate that offers intrinsic value and it is called the ‘Dividend Discount Model’ which is still used today by professional investors on the institutional side of markets.

Where Are the Customers’ Yachts? or A Good Hard Look at Wall Street
by Fred Schwed, Jr

Humorous and entertaining, this book exposes the folly and hypocrisy of Wall Street. The title refers to a story about a visitor to New York who admired the yachts of the bankers and brokers. Naively, he asked where all the customers’ yachts were? Of course, none of the customers could afford yachts, even though they dutifully followed the advice of their bankers and brokers. Full of wise contrarian advice and offering a true look at the world of investing, in which brokers get rich while their customers go broke, this book continues to open the eyes of investors to the reality of Wall Street.

The Intelligent Investor: A Book of Practical Counsel
by Benjamin Graham

Since it was first published in 1949, Graham’s investment guide has sold over a million copies and has been praised by such luminaries as Warren E. Buffet as “the best book on investing ever written.” The hallmark of Graham’s philosophy is not profit maximization but loss minimization. In this respect, The Intelligent Investor is a book for true investors, not speculators or day traders. He provides, “in a form suitable for the laymen, guidance in adoption and execution of an investment policy.” Where the speculator follows market trends, the investor uses discipline, research, and his analytical ability to make unpopular but sound investments  in bargains relative to current asset value.

Paths to wealth through common stocks
by Philip Fisher

Paths to Wealth through Common Stocks contains one original concept after another, each designed to greatly improve the results of those who self-manage their investments — while helping those who rely on professional investment advice select the right advisor for their needs. In this book Fisher analyzes how worthwhile profits have been and will continue to be made through common stock ownership, and revealing why his method can increase profits while reducing risk. Many of the ideas found here may depart from conventional investment wisdom, but the impressive results produced by these concepts — which are still relevant in today’s market environment — will quickly remind you why Philip Fisher is considered one of the greatest investment minds of our time.

Bull: A History of the Boom and Bust
by Maggie Mahar

Citing studies by esteemed economists John Kenneth Galbraith and Charles Kindleberger, Mahar reminds readers that self-blinding euphoria is a regular feature of every bull market. In vivid detail, she documents the trends and outsized personalities that fueled this particular bull market, including the surge of leveraged buyouts of 1984-1987, the mania for junk bonds, falling short-term interest rates, the rush of individual investors into 401(k)retirement plans, the power (and appetites) of mutual funds and the media frenzy that lent an unlikely allure to quarterly corporate earnings reports. The book serves as a reminder that investors should employ skepticism towards information coming out of corporate management.

Security Analysis: Principles and Technique
by Ben Graham and Dave Dodd

Benjamin Graham’s revolutionary theories have influenced and inspired investors for nearly 70 years. First published in 1934, his Security Analysis is still considered to be the value investing bible for investors of every ilk. Yet, it is the second edition of that book, published in 1940 and long since out of print, that many experts–including Graham protégé Warren Buffet–consider to be the definitive edition.

Common Stocks and Uncommon Profits
by Philip A. Fisher

Regarded as one of the pioneers of modern investment theory, Philip A. Fisher’s investment principles are studied and used by contemporary finance professionals including Warren Buffett. Fisher was the first to consider a stock’s worth in terms of potential growth instead of just price trends and absolute value. His principles espouse identifying long-term growth stock and their emerging value as opposed to choosing short-term trades for initial profit. First published in 1958, this investment classic is considered a must-read as the foundation for many of today’s popular investment beliefs.

10 Investing Books Recommended By Warren Buffett

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Real estate, along with many other investments such as stocks, bonds and mutual funds, can be found right now at prices lower than in recent years.  Some would say it’s the best opportunity we’ve seen so far in our lifetime.  Couple that with the $8,000 first-time homebuyer credit available if you close on a property and take title before December 1^st, 2009, and you have a potentially winning combination.

So, what is a first-time homebuyer anyway?  It’s not as restrictive as it sounds.  IRS rules say that as long as neither you nor your spouse have owned your own home for at least three years prior to purchasing a new one, then you’re a “first-time home buyer”!  If you’re married, and your spouse has owned a home, neither of you can qualify, but if you have a significant other and you’re not married, then you could.

It’s also possible to get less than $8,000, as the credit is equal to 10% of the purchase price up to $8,000.  That’s not a problem where I live, but if you live in one of the many states where it’s possible to buy houses for less than $80,000, you should be aware of this restriction.

There are income limitations, which you can’t exceed and still qualify as well.  If you’re single, your eligibility for this credit starts to phase out if you make $75,000 or more and goes away completely if you make more than $95,000.  If you’re married the phase out begins at $150,000 and the credit is completely gone at $170,000.  IRS Form 5405 will help you figure out what you can claim.  By the way, those numbers aren’t your gross income; instead they represent Adjusted Gross Income and are found on the last line of the front page of your 1040 form.

Other benefits and restrictions can also apply, so you’ll want to check with your tax preparer.   The biggest thing to keep in mind, however, is that you need a place to live, and the prices are very likely to resume going up in the future, so that consideration along with this potential benefit can be to your advantage.  By the way, this is not a tax deduction; it is a dollar-for-dollar credit against what you might owe.  If you owe $1,000 not counting this credit, you could be eligible to get a $7,000 refund instead!

Last but not least, don’t confuse buying your own personal residence with an investment.  If you have more than just a personal residence and you use that for rental income, then you have an investment. My definition of an investment is anything that puts money into your pocket, and your personal residence will take money out of your pocket until you sell it.  That’s not “conventional wisdom”, but lots of conventional wisdom isn’t wisdom at all.

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