Stimulus Countdown

I’m planning to buy a first home this year, and I’m also thinking about purchasing a new car. Do I still have time to take advantage of tax breaks from the economic-stimulus package that President Obama signed into law last February?

R.S., via e-mail

Yes, but you’ll have to scramble to take advantage of the $8,000 first-time home-buyer credit. To qualify, you must close on a home no later than November 30.

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You’re considered a first-time home buyer if you (and your spouse, if you’re married) haven’t owned a home in the past three years. The credit begins to phase out if your modified adjusted gross income is more than $75,000 (or $150,000 if you’re married filing jointly), and it disappears if your income exceeds $95,000 if you’re single (or $170,000 if married filing jointly).

You don’t have to pay back the credit as long as you live in your home for at least three years. After you close on the house, you can get the $8,000 refund more quickly if you claim the credit for a 2009 purchase on an amended 2008 tax return (download Form 1040X at www.irs.gov).

The stimulus plan also lets you write off state and local taxes and excise taxes paid on up to $49,500 of the cost of a new car you buy between February 17 and December 31, 2009. If you live in a state that doesn’t have a sales tax, you still get a tax break if your state imposes a flat fee on the purchase of vehicles or a fee based on the price you pay.

The tax deduction is phased out for taxpayers with modified AGI between $125,000 and $135,000 (between $250,000 and $260,000 for married couples).

Behind the death-panel hype. I’ve heard a lot about the “death panels” in the health-care legislation that would ration care for the elderly. Is this accurate? B.H. Baltimore

The U.S. House of Representatives health-reform bill says nothing about death panels. The provision in the bill that fed the rumors would permit doctors to be paid once every five years for an “advance care planning consultation” with Medicare beneficiaries. That includes discussions about living wills, health-care proxies and other steps to inform your family members and doctors of your wishes regarding medical decisions in the event that you cannot make those decisions yourself.

No matter what happens with this portion of the legislation, it’s a good idea to talk with your doctor about these issues and know your options. Then have a lawyer draft a living will and a durable power of attorney for health care -- the legal documents that make your wishes known.

You can find a lawyer through the National Academy of Elder Law Attorneys (www.naela.org). For more information about advance directives, go to the estate-planning section of www.nolo.com. Withdrawing retirement savings.

To fund my retirement account, I used dollar-cost averaging, making deposits at regular intervals for more than 40 years. Now I must start withdrawing my savings. What is the best strategy for withdrawals during retirement? Lew Strumpf Putnam Valley, N.Y.

In general, you should withdraw 4% of your savings during your first year of retirement and increase the dollar amount to adjust for inflation each year after that. This strategy helps your savings last through bear markets. But given the magnitude of the 2007Ð09 cataclysm, consider skipping the annual inflation adjustment until your account balance rebounds. If your losses were severe, you may want to reset your withdrawal schedule and take 4% of the new, lower balance, so that your remaining assets have more time to recover.

Next, decide which accounts to tap and when. Generally, you’ll want to keep your tax-advantaged money earning returns longer, so it’s smart to start with your taxable accounts. Uncle Sam taxes gains from the sale of investments you have held more than one year at a maximum rate of 15%, and you can use losses to offset gains and up to $3,000 of ordinary income. (If you can limit your taxable income to $33,950 -- $67,900 for married couples -- in 2009, you’ll pay no tax on your capital gains.) Next, tap tax-deferred accounts, such as traditional IRAs and 401(k) plans, which are taxed at your ordinary income-tax rate. You’ll have to start withdrawing from these accounts by the time you reach age 701/2 (except this year because the required minimum-distribution rule was suspended for 2009). Save your tax-free Roth accounts for last. Because Roth IRAs don’t require you to take distributions, you can build up a nice legacy to leave to your heirs tax-free.

Finally, consider how you want to allocate your assets. While dollar-cost averaging can be a cost-effective way to build a nest egg, the reverse strategy can hurt you if you are withdrawing funds from declining assets. By diversifying your investments, you can pull money out of your winning assets and allow the losers time to rebound. Of course, any withdrawal will change your overall asset mix, so you’ll have to rebalance your portfolio regularly to bring it back in line with your investment goals. If you need help, T. Rowe Price has a free retirement-income calculator at www.troweprice.com/retirementcalc.

Credit scores and insurance. Our auto-insurance company increased our premium by $150 per year based on our credit score. Can it do that? D.B. via e-mail

In most states it can. In fact, many insurers changed their pricing models over the past few years to make credit scores a much larger factor in setting auto- and homeowners-insurance premiums. Insurers have found a strong correlation between credit scores and claims: People with low scores are a lot more likely to file insurance claims than people with high scores, and drivers with the best credit scores are involved in fewer accidents than those with the worst credit scores.

In the wake of the economic turmoil, some states have adopted laws requiring insurers to let people request an exception to the credit-based rating because of extraordinary circumstances that have affected their credit score -- such as serious illness or injury; death of a spouse, child or parent; divorce; identity theft; temporary loss of employment; or military deployment overseas.

But even if you live in a state that hasn’t adopted a law, let your agent or insurer know about any life-changing events that have affected your credit score -- before you apply for a policy. Some companies check your credit score only when setting your rate as a new customer; others review your score once a year.

My thanks to Tom Anderson for his help this month.