It would be a prudent move only if substantial tax savings result
Assets & Answers
By:Shannon Buggs
Copyright 2007 Houston Chronicle
Personal finance columnist Shannon Buggs answers readers' questions about managing money
Q: I'm a retired widow who will be returning to work full time this summer.
My problem is I don't have transportation. I want to finance a new car by obtaining a home equity loan. My home is free and clear and valued at $95,000. I don't like making debt, but it seems to me that now is a good time to do so.
Do you have any information on the best lenders for this type of loan?
A: Credit unions offer some of the most inexpensive auto loans in the country.
National new-car loan rates for three to five years are at about 7 percent, according to BankRate.com. You may find that with a credit score of 700 or higher, you can get a much cheaper loan through a credit union.
Many credit unions have broadened their memberships beyond a base of employees to include people living or working in nearby geographic areas. It should be easy to find one you can join.
If your interest in a home equity loan to finance your auto purchase is mainly for tax reasons, then you need to weigh the benefits of going this route.
If the rate for the home equity loan matches what you can get from the credit union, then a home equity loan may be a better deal for you.
The interest from the home equity loan can be written off on your taxes and can lower your overall tax bill, if your itemized deductions are higher than the standard deduction. And that lower tax bill may be worth paying a little more in interest each month for a home equity loan.
But if you can't reap a substantial tax savings from the home equity loan, it does not make much sense to risk your home for a car.
Q: What is nontaxable income?
A: It is money you receive that is either partially taxed or not taxed at all by the government. Common sources of income not taxed:
• Child support payments
• Gifts, inheritances and bequests
• Cash rebates from a manufacturer or dealer
• Compensatory damages awarded by a court for physical injury or physical illness
• Welfare benefits
• Reimbursements for qualifying adoption expenses
• Tax-exempt interest from municipal bonds and tax-exempt bond mutual funds
• Reimbursements for work-related meals and lodging
Life insurance does not make that list because sometimes it is taxable. If you surrender a life insurance policy for cash, you must include in your taxable income any proceeds that are more than the cost of the life insurance policy, the IRS says.
However, life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price, the agency says.
Another type of income absent from the list because of stipulations is scholarships, grants and fellowships.
If you are a candidate for a degree, you can exclude from taxable income amounts you receive as a qualified scholarship, grant or fellowship, but not amounts you receive to pay for room and board, the IRS says.
• IRS Publication 525, Taxable and Nontaxable Income: www.irs.gov/publications/p525/index.html
Love for sale
As you know, it's Valentine's Day. The average American consumer is expected to spend $123 on loved ones to celebrate the day, according to a survey conducted for the National Retail Federation.
Total spending on Valentine's Day candy, flowers, jewelry, clothes, gift cards, restaurant meals and personal services is expected to reach $17 billion.
That's based on six out of 10 consumers commemorating Valentine's Day by spending money.
But just as it is not your patriotic duty to shop to keep the national economy out of recession, it's not your romantic duty to raid your bank account to keep your relationship out of a rut.
Express love for spouses, significant others, family and friends in ways that respect your budget. Tips on inexpensive Valentine's Day gestures can be found at eHow.com and RealSimple.com.
Columnist Shannon Buggs has completed the personal finance planning certificate program at the University of Houston.
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