You can expect to hear a lot more about "Qualified Mortgages" in 2014 because it is likely to become the new standard in mortgage lending.  The Consumer Financial Protection Bureau has created a new category of loans, Qualified Mortgages, which will apply to most mortgage loans and will become effective January 10, 2014. 

Under the new rules, the lender will have to determine that the borrower has the ability to repay the loan.  The lender will generally have to consider eight types of information:

1. Current income or assets.
2. Current employment status.
3. Credit history.
4. Monthly payment for the mortgage.
5. Monthly payment on other mortgage related loans.
6. Monthly payment for other mortgage related expenses such as property taxes.
7. Other debts, including student loans and child support.
8. Monthly debt payments, including the mortgage, and an analysis of how much money the borrower will retain after paying all debts. 

In addition to these considerations the most important factor in a Qualified Mortgage is that the rules impose a debt-to-income ratio of 43 percent.  This means that a borrower cannot spend more than 43 percent of their monthly income paying debts, including mortgages, credit cards and child support.

Furthermore, a Qualified Mortgage cannot have the following loan features:

• An interest-only period.
• Negative amortization.
• Balloon payments - although balloon payments may be allowed in certain circumstances.
• Loan terms that are longer than 30 years.

While the impact of the new mortgage rules is uncertain, mortgage lenders, real estate trade groups and research firms predict that the rules under a Qualified Mortgage will make borrowing more difficult for many individuals.  The Consumer Financial Protection Bureau acknowledges that under the new Qualified Mortgage rule, lenders will have to reject more mortgage applicants than before but believes that the total number of those rejected will only grow by 10 percent.  The Consumer Financial Protection Bureau also admits that there are many instances in which a borrower can afford a debt-to-income loan above 43 percent but may not qualify under a Qualified Mortgage. However, private research firms indicate that between 10 percent to 50 percent of borrowers who now qualify for a mortgage loan will lose out and many of those borrowers are very qualified borrowers.  Those likely to find borrowing more difficult will be:

• First time homebuyers, especially those with student loans.
• Those who lost jobs in the recession or who have had career disruptions in the last five years.
• People who live in high-priced housing markets or places hit hard by the collapse.
• Small businesses or independent contractors whose income fluctuates.
• Retirees with adequate savings but due to lack of income will make borrowing more difficult.

What can you do if you find that you are a home buyer in one of the groups who will likely have a difficult time borrowing due to the new mortgage requirements?  Keep saving your money and build up a large down payment.  The greater your down payment, the lesser the amount borrowed will be, and you will have a lower debt-to-income ratio.  In addition, consider buying a smaller and less expensive home.  It may not be the home you previously envisioned purchasing but you will build equity in your own property instead of your landlord's.  

2013 Year-End Tax Planning

by Steven M. Weiser, Esq.

2013 presents some interesting tax planning challenges for taxpayers.  Higher income tax rates apply to individuals for ordinary income, capital gains and dividends as compared to recent years.  Additionally, a 0.9% tax on wages and self employment income as well as a complicated 3.8% surtax on net investment income apply.

There are some tax breaks scheduled to expire that will not be around next year unless Congress takes action.  These include the option to deduct state and local sales and use taxes (instead of income taxes), an above-the-line deduction for qualified higher education expenses, tax-free distributions from IRAs for charitable purposes (available to those age 70 or older), 50% bonus depreciation for new machinery, equipment and software, an exceptionally high ($500,000) section 179 expensing limitation, and a 15-year write-off for qualified leasehold improvements, restaurant buildings and improvements and qualified retain improvements, just to name a few.

The new 0.9% Medicare tax may require some action on the part of employers.  The tax applies to individuals receiving wages in excess of $200,000 ($250,000 for joint filers), which means employers should take a close look to ensure they have been withholding tax, and self-employed persons need to make sure the tax is taken into account when computing estimated tax payments.

Here are some additional items to consider as the year comes to a close:

• Examine your flexible spending account elections for 2013 and consider whether you need to modify your elections for 2014.  Also, make sure you have submitted documentation for all of your eligible reimbursement requests.
• If you have a health savings account (HSA) make sure to get your contributions in before year end.
• Realize losses on investments in securities to offset some of your taxable income or capital gains.
• Of course it is always nice if you can postpone income to 2014 and accelerate deductions to 2013.  However, you should always consider what your effective tax rates will be for each year so be careful.
• If you converted assets from a traditional IRA to a Roth IRA and the assets have declined in value, you may wind up having to pay a higher tax on the conversion than is necessary.  You can back out of the transaction and later reconvert to a Roth IRA.
• If you are expecting a 2013 bonus from your employer, you may want to arrange to defer payment of that bonus to 2014.
• Consider using a credit card to prepay expenses that can generate tax deductions (but please be sure that you can pay that balance off in 2014!).
• If it is looking like your estimated tax payments were too small in 2013 and you may be facing a penalty, consider taking an eligible rollover distribution from a qualified retirement plan in 2013.  Income tax will be withheld on the distribution and will be treated as if paid pro rata over the full 2013 (to reduce any underpayments of estimated tax and lessen or eliminate penalties).  A timely rollover of that distribution (as increased by the withheld tax) to a traditional IRA will avoid income taxes and penalties on the distribution.
• If you are a homeowner, consider making energy saving improvements that can qualify for a tax credit (if installed prior to 2014).
• For estate and gift tax planning purposes, make sure to take advantage of the gift tax annual exclusion of $14,000 in 2013.  You can make these $14,000 gifts to as many donees as you like.
• For businesses, if a large expenditure for depreciable assets is being considered, 2013 might be an excellent time to get this done to claim a large section 179 tax deduction.  Additionally, you may qualify for the 50% bonus first year depreciation.
• If you are self-employed consider setting up a retirement plan to defer taxation on some income that you set aside.

This list is by no means all-inclusive.  If you would like to discuss your year-end tax planning we would love the opportunity to meet with you.