Q: What's the pay limit for domestic help before one has pay Social Security taxes? I'm trying to figure out how many times I can have a dog walker visit before I have to pay her Social Security taxes. I pay this tax for my housekeeper, and I'd like to avoid another set.
F.K., Washington, D.C.
A:Hope that your dog walker charges very, very low rates. According to W. Thomas Curtis, a certified financial planner in Gaithersburg, Md., domestic service performed in the private home of an employer (or, in this case, out on the sidewalk) by an individual isn't a FICA wage if it's less than $1,500 during the entire calendar year. The limit was $1,400 in 2005.
Q: Can you tell me how to invest in tax lien certificates?
M.N., via e-mail
A:A tax lien is a legal encumbrance placed on a property for failure to pay taxes. Investors who buy the lien either become owners of the property or, more likely, receive a fee when the property owner comes up with the back taxes plus penalties to be paid to the government and the investor.
To learn the basics, we turned to Michael Williams, coauthor of www.rogueinvestor.com, a website devoted to tax lien investments. Periodically, he says, a county has an auction to raise taxes that weren't paid on property in its jurisdiction. To entice investors, a mandated interest rate is added. The rate varies from state to state, but usually ranges from 10 to 24 percent per year. The state then creates what is called a tax lien certificate. This is the physical piece of paper that gives the investor a legal claim to the investment.
An investor who buys the tax lien certificate issued for the property is essentially paying off the tax debt. The property owner now owes the tax lien investor all the back taxes plus the interest due.
In about 95 percent of the cases, the property owner eventually comes up with the money, including any interest due. Sometimes, however, the owner can't come up with the money during the required period of time. In most states, the property is then forfeited to the investor. The investor then forecloses on the property and, in return for paying all remaining liens, taxes, and penalties due, receives the entire property, often for a fraction of what it's worth.
Mr. Williams likes tax liens because they offer a high return – 10 percent to 24 percent is not uncommon, and 100 percent is sometimes possible – and are relatively low risk because they are tied to real estate. The sales are run by local governments, so they're typically well documented and regulated.
These are not liquid investments, however. "You don't know exactly when you will be paid, and in the case of deeds, you're buying real estate, which must be sold or rented to realize income or capital gains," he says.
Plus, title companies sometimes won't issue title insurance for some time on any property bought at a tax deed sale. And purchasing tax liens and deeds requires cash. Although you can buy liens for as little as $25, Williams says, to really get started, you should plan to invest at least $5,000 to $10,000.