Your Tax Questions Answered

ANSWER: Have you figured out your business plan yet? If not, slow down. Before you tackle what to do with your mortgage, first flesh out the details of your small-business idea. Consider everything from funding to marketing to sales goals for your first year of operations. "Do your homework. Be cautious. Take your time. And talk to a lot of people," says Santa Ana, Calif.-based financial planner Karl Romero. Starting a business always costs more than you think it will, so make sure you'll have enough cash on hand to get things rolling. Also, be sure to pump up your emergency fund so that it has at least six months' worth of living expenses, should times get lean.

As far as that mortgage is concerned, two issues are at play: finances and emotions. Financially speaking, paying off your mortgage can save you thousands — even hundreds of thousands — of dollars in interest payments. But mortgage debt typically comes cheap, especially when you factor in the tax break on the interest. Consider that for someone in the 28% tax bracket, the after-tax rate on a 6% mortgage is a mere 4.3%. Chances are you could do much better than that by investing long-term in the stock market, even after you ante up to the IRS. Paying off your mortgage also doesn't make sense if you're simply going to turn around and tap that equity to fund your new career.

But if paying off your debt gives you the confidence and the cash flow to set out on your own, it's not a terrible idea to pay off your loan. As the housing mess of the past year has shown, living debt-free certainly has its perks.

QUESTION: My parents are retired and visited me from India for four months. Can I claim them as dependents on my 2007 tax return?
— Dinesh Parmar, Boston

ANSWER: Claiming your parents as dependents requires more than being a dutiful host and son. First your parents must be U.S. citizens or U.S. resident aliens (which basically means they have green cards or have spent substantial time in the United States for the past three years). They also need to have Social Security numbers or taxpayer identification numbers. And that's the just beginning: Gross income for each must be below $3,400 in 2007, and you had to have provided more than half of their total support over the past year. Even then, dependent exemptions are subject to phase-out rules for married folks with gross income above $234,600, $156,400 for singles. In other words, being able to take this tax deduction is going to be a long shot at best.