Money Management

Putting larger amounts into tax-sheltered annuities

Q I work part-time for a nonprofit hospital and have been contributing as much of my salary as allowed to a 403(b) plan (tax-sheltered annuity). Will my maximum permissible contribution be higher this year?

A Very likely. The tax law passed in 2001 did away with the complex rules restricting contributions to 403(b) plans. Starting in 2002, the limits are the same as those for defined-contribution plans. And the additional "catch-up" contributions available for plan participants 50 or older also apply. (See "Make the most of the new tax law," Sept. 17, 2001.)

If a couple sells a home only one of them owned

QSome 10 years ago, I took my name off the title to our home, because I thought I might be the target of a lawsuit for high damages. I wasn't sued, but I never got around to putting my name back on the title, so my wife was the sole owner of record when we sold it last month at a $375,000 profit. Will we owe tax on any of that?

A No, assuming both of you lived in the home for at least two of the five years before the sale. You can claim the full exclusion (up to $500,000) on a joint return, even though only one of you owned the house during that time.

How big a down payment on a home mortgage?

QWe're buying our first home and can afford to pay up to a third of the price in cash. Is it wise to put down that much?

A Probably not. Lenders must waive the mortgage insurance requirement if the down payment is at least 20 percent, so consider that the minimum. But before going higher, you should set aside several months' income for emergencies and pay off any existing high-interest obligations, such as credit card debt.

Next, make sure you take full advantage of the newly liberalized limits on contributions to tax-deferred retirement plans and IRAs. If you have any free cash left, compare the interest a higher down payment would save you with the return you could get by investing the money. Assuming you're willing to take moderate investment risks, you'll likely decide not to tie up the money in your mortgage.

Pension contributions if you become disabled

QI've read that some disability policies will make up for missed 401(k) plan contributions if a disability keeps me from working. Can you clarify the tax angles?

A If your employer pays the policy premiums, you'll owe tax on the contributions when they're made to the 401(k) plan on your behalf. If you pay the premiums yourself, the contributions will escape tax. In either case, you'll be taxed on the earnings from those contributions when you receive them.

If the make-up insurance payments go into a separate trust rather than the 401(k), the earnings may not be tax-deferred. (See "Options for boosting your disability coverage," March 8, 2002.)

When you can claim a bigger car write-off

QI've heard that a law passed this year raises the annual limit on depreciation allowed for a business car. What's the new limit? I'd like to take advantage of it by converting a personal auto for use in my practice.

A You can't. The higher limit applies only to cars purchased for business use and put into service after Sept. 10, 2001 and before Sept. 11, 2004. For such cars, the depreciation limit is increased by $4,600 in the first year of use. So if you buy a car this year and use it 100 percent for business, you'll be able to write off $7,660. If you use it for business only 80 percent of the time, say, you can claim just $6,128.

Edited by Lawrence Farber,
Contributing Writer

Do you have a money management question that may be stumping other doctors, too? Write: MMQA Editor, Medical Economics magazine, 5 Paragon Drive, Montvale, NJ 07645-1742, or send an e-mail to memoney@medec.com (please include your regular postal address). Sorry, but we're not able to answer readers individually.

 

Lawrence Farber. Money Management. Medical Economics 2002;20:67.