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Dear Dr. Don,
My husband was recently transferred to New Jersey. We sold our home and now we have no debt and no apparent income tax write-offs. My husband is 50 years old and I’m 49.
We are currently renting a condo and have no desire to purchase property in New Jersey. We would, however, consider purchasing a vacation home in another state. His current income is $180,000, while I make $12,000 a year. We are maxing out his 401(k) contributions. Can you help us decide how to invest to achieve the largest tax advantage? I’m also wondering whether we should buy a vacation home and rent it out. Should we open individual retirement accounts? Are there other options we should be aware of? I’m really afraid to do our taxes this year, thinking we’re going to get socked with a huge bill.
— Shelly Shell-Shocked
Don’t let taxes dictate how you make investment decisions. It appears that you are in the 28 percent marginal federal income tax bracket, but your average federal income tax rate is about 18.6 percent using the standard deduction with no itemized deductions.
The ability to make tax-deductible contributions to a traditional individual retirement account depends in part on whether your husband has a qualified retirement plan at work. You can always make non-deductible contributions to a traditional IRA capped by the contribution limits for the accounts.
There are income limitations dictating the ability to contribute to a Roth IRA. You may convert a traditional IRA to a Roth IRA without income limitations. Even so, a Roth IRA or non-deductible contributions to a traditional IRA won’t put you in a lower federal income tax bracket.
Investing in a vacation home as a rental would give you a mortgage interest and other deductions that should be better than the standard deduction. There are details about renting out a second home that you should know about. That’s particularly if you’re planning to use it part time yourself.
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