Consumer questions: Buying vs. renting

September 12, 2008 12:00:00 AM PDT
Michael Finney answers your consumer questions on IRS audits, buying vs. renting a home and saving for college.

Can you prevent an IRS audit?

Question: "I was just wondering what are some things or some errors I need to avoid to prevent being audited by the IRS?"

Answer: Due to the random nature of some IRS audits, you can't completely avoid them. Expect to see more of this as more IRS agents are hired. There are some things you can do to help prevent an audit though. First, no math errors. Second, whatever your income level is, there are certain parameters of how you would normally act. If you have an income of $60,000 a year, it would be very unlikely that you would give $10,000 to charity. Third, if you have a job that deals in cash, they're going to audit you more.

Is it a good time to rent or buy a home?

Question: "I live in Alameda, and I wonder right now whether it's better to rent or buy a house?"

Answer: Right now, it's pretty even. It depends on the neighborhood you want to live in and where you're living now. A lot of people have lost their homes, so they're renting. Getting a mortgage is so tough that there are more renters out there. So with more renters, the cost of renting is starting to go up. It had fallen for a long time because everyone was buying. So now things are kind of at their tipping point. Do the math and remember the huge tax break you get. A lot of first-time homebuyers don't realize that they're going to write-off their entire house payment and entire taxes. So they forget how much money they're not going to be spending and what Uncle Sam is going to give them back.

Saving for college

Question: "Being that the economy is the way it is, my son's college fund is in mutual funds right now. Should I be moving it to some other option at this time?"

Answer: It depends on how old your son is. We always think about being avery aggressive for our kids because they're young and we know that the younger a person is, the more aggressive you can be in your investments. A college fund is very similar to a retirement fund. As you're coming up towards the end of it, you have to get more conservative, so the money is there. The stock market on average pays 8 to 8.5 percent in a year, but that average is over 30 or 40 years. You can have a bad 10 years. So if your kid is in high school, move in to safer investments like money markets, etc., because in four years you'll be paying for college and you won't have a lot of makeup time.

For more of Michael Finney's consumer stories and advice, visit 7 On Your Side.

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