Extreme makeover: Single mom can bank on tax benefits

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Lisa Stansbury of Baton Rouge, La., is a single (widowed) mother who plans to attend college part-time next year to earn a doctorate. Her 21-year-old daughter attends college full time. Stansbury would like to retire in 10 years when she turns 60. She sold her single-family home last year and wants to buy a new one. She’s looking to cut taxes in any way that is possible.

Eva Rosenberg, who is an enrolled agent and the founder of TaxMama.com, advises Stansbury to lend her daughter money to buy the home to snag the first-time homebuyers’ credit of $8,000 that expires at the end of this year. Stansbury can pay her daughter rent and take a deduction for home-office expenses for her side business. Her “daughter will show little or no taxable income, after mortgage, property tax, insurance, utilities [and] depreciation,” Rosenberg says. Plus, Stansbury can gift additional money to cover any of her daughter’s cash shortfall, she notes. Stansbury should maximize her contributions to her employer’s 401(k) plan and, if available, the Roth version of the 401(k) plan, to benefit from lower taxes in retirement. Regarding school, she should take advantage of the federal tax credits. If there are costs left over, Stansbury might be able to deduct them as employee business expenses or as expenses related to her side business. If her daughter is working or is her business associate, some of her daughter’s courses might qualify as business deductions, Rosenberg notes.

Mary P. Canning, who is a tax attorney, warns that without the deductions for which Stansbury likely qualified by owning a home, her federal taxes will approximately double. She agrees that this might be the time for her to buy a home. She advises Stansbury to consider energy-efficiency-improvement tax credits. Another option: Invest in rental real estate to benefit from untaxed appreciation on the property (until she sells it) to provide an income stream in retirement.