eFinPLAN.com “Taking the mystery out of financial planning” Newsletter

Topics: Changes under Obama:

• Making Home Affordable

• American Recovery and Reinvestment Act of 2009

• First-time Home Buyers Tax Credit

• Blog Role: Informative and Interesting financial blog discussions

Introduction:

The new administration has brought many new changes to our tax and financial systems. This newsletter covers many of the top changes that may affect you. This is a brief review; be sure to consult your tax, legal, financial and lending trusted professional advisors for complete information. They can also advise you on how these changes may apply to you.

Making Home Affordable

Last month President Obama created the “Making Home Affordable” program to  allow existing homeowners to keep their homes by making mortgage payments affordable. The plan is estimated to help about 9 million people, but it will not help borrowers who have insufficient income to make their mortgage payments, investor borrowers or borrowers who have no income and cannot make any mortgage payment.

There are two parts of the plan: Refinance allows non-delinquent homeowners who have underwater mortgages to refinance to the lower current rates. Modification allows homeowners a loan modification, to a lower rate, perhaps lower than current rates (2% minimum). Both programs are only for a primary residence (1 to 4 units), and both require a stable income and an evaluation.

The requirements of the Refinance option are: You must have a Fannie Mae or a Freddie Mac loan and you must be current on your mortgage payments. To meet the definition of “Current” requires that you haven’t been late more than 30-days in the last 12 months. All loans will be refinanced into 15- or 30-year fixed rate loans. The interest rate would be determined according to the market rate on closing (there may be refinance fees). The amount you owe on your first mortgage cannot be more than 105% of the value of your home.

The Refinance program may be a solution for some homeowners whose mortgage interest rates are much higher than the current market rates, who are paying interest only, or who have a low introductory rate that will increase (teaser rate). Refinancing will not reduce the principal amount you owe on the first mortgage or on any other debt.

The requirements of the Modification option are: You must demonstrate significant hardship, such as loss of an income, or have a mortgage payment more than 31% of your gross income, or have a loan originated on or before January 1st, 2009, and the unpaid principal balance must be equal to or less than the following: 1 Unit: $729,750, 2 Units: $934,200, 3 Units: $1,129,250, 4 Units: $1,403,400. Borrowers are not required to be behind on their payments, but if they have missed two or more payments and their servicer is participating in the program, they may be eligible.

If you qualify for Modification, your interest rate will be reduced up to 5 years to a rate that makes your mortgage payments affordable, perhaps lower than current rates (2% minimum). If this isn’t enough to make payments affordable, the servicer may extend the mortgage out to 40 years and defer repayment on a portion (principal forbearance) that may be subject to a later balloon. The lender may also forgive part of the loan. In addition, the program can pay Success Incentives of up to $1,000 per year for up to 5 years toward a reduction in your mortgage.

After 5 years, the rate may increase, but not by more than one percentage point per year until it reaches the rate cap. The rate cap is the market interest rate on the date the modification is finalized — not higher than the market rate on the day your loan was modified. If the modified rate equals or exceeds the market rate, it will be fixed for the life of the loan. If the modified rate is temporarily lower, it increases to the market rate after 5 years.

The official pages for this program are at financialstability.gov/makinghomeaffordable/, gov/docs/borrower_qa.pdf, and treas.gov/

American Recovery and Reinvestment Act of 2009

On February 17^th President Obama signed into law this act, a mixture of personal and business tax incentives and direct spending that is designed to jump-start the US economy. Brief highlights as captured from the excellent report from Deloitte “First Steps - An analysis of the tax provisions in the American Recovery and Reinvestment Act of 2009” are below. Read the full document.

Increase AMT exemptions for the alternative minimum tax for 2009 from $46,700 to $46,700 for individuals and from $69,950 to $70,950 for married couples filing jointly. $400-per-worker tax credit for low/middle income workers, or $800 for couples, or an amount equal to 6.2 percent of the taxpayer’s earned income. It is refundable even if the taxpayer has no income tax liability. The credit is phased out as an individual’s modified adjusted gross income increases from $75,000 ($150,000 married) to $95,000 ($190,000 married).

Earned income tax credit (EITC) increase to provide a refundable tax credit for low- and moderate-income wage earners, by increasing the EITC credit percentage applicable to families with three or more children, and by granting additional marriage penalty relief. The change for this year will result in a maximum credit of $5,657, up from $5,028.

Unemployment compensation exempts up to $2,400 from tax on unemployment benefits for 2009.

Expand a tax credit for college tuition expense by adding two provisions intended to make it easier to finance the costs of higher education. American Opportunity Tax Credit -- For 2009 and 2010, replaces the existing Hope Scholarship Credit for qualified tuition expenses with a more generous American Opportunity Tax Credit. This is accomplished by temporarily increasing the amount of the existing Hope credit, extending it to cover four years of schooling, raising the income limits on that credit, and allowing up to 40 percent of the credit to be refunded. Expenses eligible for the credit now include required course materials. Under the change, the American Opportunity Tax Credit will provide a benefit of up $2,500 per student per year (formerly up to $1,800). The credit applies to 100 percent of the first $2,000 of qualified expenses and 25 percent of the subsequent $2,000. The credit will be phased out for taxpayers who have AGI between $80,000 and $90,000 ($160,000 and $180,000 for married taxpayers filing a joint return). The phase-out ranges for the Hope credit for 2009 would have been from $50,000 to $60,000 for singles and $100,000 to $120,000 for married couples.

Deduction for new car sales and excise taxes to allow for an itemized deduction. This creates an additional standard deduction for non-itemizers for state sales and excise taxes paid or accrued on the purchase of a qualifying motor vehicle. Under the Act, qualifying motor vehicles include a passenger automobile or light truck that is treated as a motor vehicle for purposes of title II of the Clean Air Act, and that does not weigh more than 8,500 pounds. and whose original use begins with the taxpayer.

COBRA premium subsidy for terminated workers for certain involuntarily terminated employees who qualify for a subsidy equal to 65 percent of the COBRA premium that would otherwise be due. Only employees who are involuntarily terminated between September 1, 2008, and December 31, 2009, who are otherwise eligible for COBRA, are eligible for the premium subsidy. The subsidy is reduced for taxpayers with adjusted gross income of $125,000 ($250,000 in the case of a joint return), and is not available for taxpayers whose modified adjusted gross income exceeds $145,000 ($290,000 in the case of a joint income tax return).

First-Time Home Buyers Tax Credit

The American Recovery and Reinvestment Act of 2009 modifies the first-time home buyer tax credit enacted under President Bush. The act extends it through December 1, 2009 and increases from $7,500 to $8,000 a refundable tax credit. The Act removes the existing repayment clause except if the home is purchased during the allowable time period, or is sold, or ceases as the principal residence within 36 months.

A First-time buyer is someone who hasn't owned a principal residence for three years before buying a house, and who has a modified adjusted gross income (MAGI) of $75,000 ($150,000 for married couples). Those with larger incomes may qualify for a reduced credit unless their MAGI is greater than $95,000 ($170,000 married couples). For homes purchased during the allowable period the taxpayer can elect to treat the purchase as having occurred in 2008. This provision allows accelerated use of the credit.

Blog Role: Informative and Interesting financial blog discussions

At eFinPLAN.com you will find “News Feeds” on the right side of the screen. These are interesting financial articles and blogs from around the Web that I think are useful. Go to eFinPLAN Blogroll to see the following and more:

• Investing in Treasury Inflation-Protection Securities from Moolanomy.com

• Advice on Second Interviews from FreeMoneyFinance.com

• Five Tips for Dealing With Job Loss from FiveCentNickel.com

• Let’s Talk About TALF from AllFinancialMatters.com

• Chart: Historical Stock Market Comebacks After Crashes from MyMoneyBlog.com

• Focus Group from MoneyRulesDebtStinks.com

• 6 steps to reducing your credit card interest rates from ChristianPF.com

• What Tax Season Taught Me About Personal Finance

• Stand Up to the IRS: Free Guide to Tax Audits (and More!) from Get Rich Slowly

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