Your Money Matters
A Consumer Financial Column
Avoid rude rental car surprises
By Jason Alderman
I'm usually a pretty savvy traveler, but a recent car rental mishap reminded me that even when you take every precaution, things still can go awry.
While planning a family vacation to Panama, I searched online for rental cars. One lower-cost rental car agency I'd never used before offered a significantly lower rate than the others. Ignoring the little voice in my head, I decided to try them.
Long story short: Although our flight was only one hour late, when I arrived bleary-eyed at the counter I was told that my car had already been given away – but I could upgrade to the next level for twice the price. After getting the runaround from the company's U.S.-based customer service department and learning that everyone else's rates had climbed equally high, I was basically stuck.
That experience taught me three lessons: A reservation isn't necessarily a guarantee; when traveling abroad, use trusted vendors – especially if it sounds too good to be true; and do better due diligence by researching travel columnists and message boards for rental tips, possible pitfalls and customer complaints.
Several car rental methods are available:
- Book directly from a rental agency (usually cheaper online than by phone).
- Comparison shop at websites like Priceline, Orbitz or Hotwire (although, I'll now be wary of buying a "blind" rental where you don't learn the carrier's name until after you pay).
- As part of a package including airfare and lodging.
I usually open several browser tabs to compare rentals side by side. Rates change constantly, so today's price may be much lower (or higher) than tomorrow's. Other tips:
- Book the best deal you can now and check back for lower rates.
- Incorporate additional fees and taxes into your comparison – sometimes they don't all show up until the "Total" page.
- Look for discount codes from membership organizations like AAA, AARP and airline frequent flyer programs.
- Consider picking up your car at a non-airport location where rates are usually – although not always – much lower.
Other decision-making factors include:
- Airport shuttle convenience.
- Fees for exceeding mileage allowances, alternate location return, late returns, or additional drivers.
- Fuel refilling charges – you may do better refilling the car yourself. Use a website/phone app like GasBuddy to find cheaper gas in the area.
- Surcharge for drivers under 25.
Rental agencies offer their own collision, liability, theft and other insurance coverage. Conventional wisdom says to avoid this route if your own insurance plans – or benefits available from your credit card – provide similar coverage. However, before automatically rejecting agency coverage, ask your insurance company and credit card issuer whether you are fully covered. Consider factors that may exclude coverage such as:
- Renting longer than 30 days.
- Certain models are excluded.
- Travel outside specified service areas.
- Whether or not you carry comprehensive and collision coverage on your own car.
- Violating rental agreement terms (reckless driving, unauthorized drivers, etc.).
Before you take possession, thoroughly inspect the car for any pre-existing damage and note it on your contract; otherwise you could receive a hefty bill for someone else's minor scratches and dents. And, conduct a thorough walkthrough when you return the car.
Bottom line: Don't gamble your precious vacation on simply finding the cheapest deal. Sometimes you get what you pay for.
Identity Theft Prevention
Over half of Americans report using the Internet for banking, and that number is rising. The surplus of financial information floating around cyberspace is a lure for identity thieves. According a study by the Federal Trade Commission more than 250,000 Americans had their identity stolen in 2010, with almost 3,000 of them in Wisconsin. Anyone is a potential victim of identity theft, from infants to the elderly. What most people don't know is that often, identity thieves don't use high-tech, complicated software or programming tricks to accomplish their crimes. They simply compile data in creative ways. So, what can you do to protect yourself?
Know what's in your wallet/purse.
In the event your purse or wallet is stolen/lost, you should know everything that's in it so you can act quickly to prevent identity theft and fraud. Know which credit cards you need to cancel, and keep photocopies of each card in a safe place. Having these copies will help when you need to know account numbers to cancel the cards. Also be aware of the information on your cell phone. Home, work and bank phone numbers can give potential identity thieves a lot of sensitive information.
Shred anything with sensitive information.
Never throw out or recycle documents with personal information on them without shredding them first. Consider switching to e-statements or electronic billing when possible to reduce the amount of paper you'll need to keep track of. If you don't own a shredder, many banks have promotional "shredding days" where customers visit the bank branch and shred their sensitive documents for free. Check with your local financial institutions to see if there's an upcoming "shredding day" near you.
Search for your information online.
An identity thief doesn't need to go dumpster diving if you post personal information online. Spend some time trying to break into your own account. Blogs, social media profiles and online resumes are treasure-troves of information for criminals. When creating passwords and updating accounts, remember that most password recovery systems use a "security question" system and then send a new or temporary password to your email account. Information like mother's maiden name, first pet and the street you grew up on are common, so make sure that information isn't readily available online.
What if your identity is stolen?
No matter how careful you are, you or someone you know may still become a victim of identity theft. File a police report as soon as possible, then call your bank and notify them of the situation. Your banker may be able to offer you further advice on how to contain the situation. You can also visit ftc.gov/IDtheft for a step-by-step guide on how to recover from identity theft.
For Mother’s Day, Discuss Mom’s Financial Future
May 7, 2012
By Jason Alderman
On Mother’s Day, children of all ages thank their moms for the many sacrifices made during their childhoods – and well beyond, considering how many adult children still hit up their moms for a loan or free babysitting.
Unfortunately, for many mothers sacrificing extends well beyond sleepless nights and boring recitals. Women frequently leave the workforce during prime earning years to care for families. Consequently, they often fall behind on pay increases and promotions, so their retirement accounts and Social Security benefits are usually much smaller than men’s. Plus, women live an average five years longer than men so their already smaller income must stretch even further.
I’m not trying to bring everyone down, but rather to suggest that your best Mother’s Day gift this year might be to initiate a frank discussion about your mom’s personal finances and how she can better prepare for the future. Here are a few topics you might discuss:
Put retirement savings first. You can always borrow money to pay for college or a house, but you can’t get a loan to pay for retirement. If she’s still working, make sure your mom is enrolled in a 401(k) plan or an IRA and saving as much as possible.
Social Security benefits. Even if your mother didn’t pay into Social Security through work, she’ll be eligible to collect benefits as long as her spouse did. And, if she qualifies under her own work record as well as your dad’s, she’ll generally receive the higher benefit amount of the two.
The longer your mom waits to draw Social Security, the larger her monthly benefit will grow. Social Security “full retirement age” is 65 for those born before 1938 and increases gradually to 67 if born after 1959. If she meets eligibility requirements, your mom can begin drawing reduced benefits beginning at 62; however, doing so will cut her benefit amount by up to 30 percent. However, by postponing benefits until after full retirement age, her benefit will increase up to 8 percent per year, up to age 70.
Also keep in mind:
- Widows can tap Social Security benefits as early as age 60 (50, if disabled). And spousal benefits are available if she’s divorced, provided the marriage lasted at least 10 years, she remains unmarried and is at least 62.
- Although many states don’t tax Social Security benefits, the federal government counts them as taxable income. So, depending on your mom’s overall retirement income, she could owe federal tax on a portion of her benefit. IRS Publication 915 has full details.
- If your mom begins drawing benefits while still working, they could be significantly reduced depending on her income. Read “How Work Affects Your Benefits” at www.ssa.gov for details. (Note: The reductions aren’t truly lost since benefits will be recalculated upward at full retirement age.)
Social Security has a great website for women with information on retirement, disability and other issues – in English and Spanish (www.ssa.gov/women).
You can help your mom estimate her retirement needs by using their Retirement Estimator, which enters her earnings information to estimate projected Social Security benefits under different scenarios, including retirement age and future earnings projections (www.ssa.gov/estimator).
Discussing finances isn’t as much fun as a picnic in the park, but your mom will appreciate your looking out for her financial future.
Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.
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How to Avoid Being a Bad Roommate
April 30, 2012
By Jason Alderman
For many people, having roommates is a natural transition between leaving their parent’s house and buying their own home. It can be a great way to trim expenses and save for the future. But if you’re not careful, cohabitating can also devolve into constant bickering over finances and dirty dishes.
Roommate tensions are not limited to strangers. When cash-strapped young adults return to the nest, or older parents move in with grown kids for financial or caregiver assistance, long-suppressed family grievances can erupt if you’re not careful.
The key to living amicably with others is open communication. All parties must feel free to ask candid questions about their roommate’s financial situation and living preferences. Schedule regular meetings to discuss household issues and air any complaints or perceived inequities before they magnify and sour the relationship.
Try to agree on living arrangement details before moving in together. If you’re moving into an established household, make sure you understand and agree with how financial obligations and tasks will be divided. A few considerations:
- Whoever signs the lease is responsible for paying rent and meeting other legal obligations, so you may want to have all roommates sign the lease if possible.
- You may need the landlord’s permission for a new roommate to move in. The landlord may want to run a credit check and may even ask that a new lease be signed.
- If one bedroom is more spacious or has a private bath, a 50/50 split may not seem fair. The same goes if assigned parking or other amenities aren’t equitable. Calculate rent amounts together so no one feels slighted later on.
- Find out which utilities are paid by the landlord and which you’ll split. Consider usage levels: Say one roommate works from home and runs the heat all day, or another never watches TV or uses the Internet.
- Some people are territorial about their food, especially when budgets are tight. Decide whether you’ll go in together on groceries, cleaning supplies and other household items or each buy your own, and set rules for replacing used items.
- Many landlords (and utilities) will only accept a single check, so it’s up to everyone to settle up and pay each monthly bill on time. Spread the risk by putting each utility in a different person’s name.
- Each roommate should carry their own renters insurance; otherwise your possessions and liability aren’t covered in case of theft or accident.
- If your place needs common area furniture or appliances, it may be simpler to buy pieces individually – and keep the receipts – so when you move there’s no question of ownership.
- Inevitably, your possessions will get mixed in together. To make it easier when your household eventually disbands, make an inventory of who owns what.
You may want to draft a roommate agreement that establishes household rules and duties. In addition to the billing and cost-sharing information outlined above, also include details such as:
- Rules for recovering your share of the security deposit.
- Rules governing pets, houseguests, parties, noise, smoking, alcohol and other potential disagreements.
- Housecleaning schedule and responsibilities.
- Agreement about how to handle damages caused by roommates or their guests.
- Move-out procedures, including how much notice is required and who is responsible for finding the new tenant.
Jason Alderman directs Visa’s financial education programs. To participate in a free, online Financial Literacy and Education Summit on April 23, 2012, go to www.practicalmoneyskills.com/summit2012.
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Should You Buy Wedding Insurance?
April 23, 2012
By Jason Alderman
Disastrous wedding mishaps have long been a comedy staple, probably because so many of us can relate. What bride- or groom-to-be hasn’t had nightmares about hurricane-force winds blowing over the reception tent or a drunken cousin falling into the wedding cake?
Besides the potential for embarrassing memories, there’s a lot of money at stake: The average wedding in 2012 will cost nearly $27,000, not including the honeymoon – about what you’d pay for a well-appointed new car.
Just as you wouldn’t drive off the lot without car insurance, so you might want to consider buying wedding insurance. It usually costs only a few hundred dollars but could save you tens of thousands if horrendous weather, sudden illness or a bankrupt vendor ruins your day.
Many insurance companies now offer wedding insurance. Typically, policies will reimburse you for deposits and charges you’ve paid to wedding vendors, as well as travel costs and other expenses incurred, if you need to cancel or postpone the wedding for a covered reason.
Coverage options, costs and limitations vary widely, so read the fine print carefully. When comparing policies, pay attention to deductibles, maximum coverage limits, exclusions and deadlines for purchasing various options.
Probably the most important coverage is personal liability insurance. Many venues require liability insurance and either include it in the rental cost or require you to submit a certificate of insurance from your own policy.
Before buying additional liability coverage, check how much coverage your homeowner’s insurance provides and whether it applies to wedding events – you may need a special rider or want to buy additional coverage through an umbrella policy.
Make sure all major wedding suppliers maintain their own liability insurance. In addition, any venue providing alcoholic beverages should carry liquor liability insurance. To be safe, you may want to buy your own host liquor liability coverage as well.
Other common options include:
- Extreme weather. If wedding party members or the majority of guests cannot reach the wedding because of severe weather conditions (snowstorm, earthquake, hurricane), rescheduling costs will be covered. Note: Gloomy skies or drizzle don’t qualify.
- If a member of the wedding party or immediate family is seriously injured, becomes too ill to attend or dies suddenly, rescheduling costs will be covered. However, illness or injury caused by preexisting conditions may be excluded.
- If an essential vendor goes out of business or doesn’t show up, you’re covered for deposits paid and possibly for the complete cost to reschedule the event.
- Some policies will pay to restage the wedding (including travel costs, cake and flowers, etc.) with the principal participants and immediate family members if the photographer fails to appear, botches the shots, or the negatives are lost, stolen or damaged; others may only pay an allowance toward reshoots.
- Gift coverage pays to repair or replace lost, stolen or damaged non-monetary gifts.
- Wedding attire coverage will pay to repair or replace the bridal gown and other special attire bought or rented for the bride, groom or attendants, when lost, stolen or damaged.
And finally, some insurers now provide “change of heart” coverage in case the bride or groom gets cold feet. If that’s a real possibility, you should probably invest in premarital counseling before looking at cakes and bridesmaid dresses.
Jason Alderman directs Visa’s financial education programs. To participate in a free, online Financial Literacy and Education Summit on April 23, 2012, go to www.practicalmoneyskills.com/summit2012.
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Should you adjust your tax withholding?
April 16, 2012
By Jason Alderman
Now that tax day has passed, chances are you’re either waiting patiently for your 2011 tax refund to arrive, it’s already been spent, or you just wrote the U.S. Treasury a check and are in budget-cutting mode.
It’s difficult to calculate exactly how much you’ll owe in taxes unless your income and family situation are identical from year to year. But going more than a few hundred dollars above or below your final tax bill is not a good idea: A big refund means you’ve been giving the government an interest-free loan, while significantly underpaying means you may have to pay costly penalties and interest on the amount.
Your goal should be to receive little or no tax refund. Better to use that money throughout the year to pay down credit card balances or other debt, build emergency savings, beef up your retirement plan contributions or invest it where you can earn interest or dividends.
Unless you’re self-employed, retired or had unexpected sources of income, the driving factor for how much tax you owe or have refunded is probably your W-4 form. That’s one of the many forms you filled out your first day on the job and probably never thought about again.
To refresh your memory: IRS Form W-4 determines how much federal income tax is withheld from your paychecks. The more allowances you claim on the W-4, the less income tax is withheld each pay period. When you file your yearly tax return, the government basically settles accounts with you: If they took out too much during the year, you get a refund; not enough and you pay additional taxes with your final return.
It’s a good idea to review your W-4 each year in case your financial or family situation has changed. For example, if you or your spouse:
- Experience a significant increase or decrease in income.
- Add a second job, start or stop working (including retirement).
- Have a child (including adoptions).
- Reduce or increase how many dependents you’re claiming.
- Get married or divorced.
- Buy or sell a house.
- File for bankruptcy.
- Increase or decrease income adjustments for IRA/401(k) deductions, student loan interest payments or alimony.
- Significantly change your itemized deductions or tax credits.
If you have a sizeable change in taxable income not subject to withholding (e.g., self-employment income, interest, dividends, capital gains, retirement distributions), you may want to either increase the amount withheld from your paychecks or make quarterly estimated tax payments. Otherwise, the IRS may charge you an underpayment penalty come next April. Estimated tax rules are fairly complicated, so refer to IRS Publication 505 for details.
Ask your HR department for a new W-4, or download the IRS version that lets you enter your information electronically and print out a copy (search www.irs.gov.) The form contains worksheets for calculating personal withholding allowances and estimating income adjustments if you plan to itemize deductions.
Generally, you’ll claim one allowance for yourself and one for each of your dependents. However, you can adjust the number to avoid having too much or too little tax withheld from your pay.
If you need additional help with the calculations, see IRS Publication 919, use the IRS’s Withholding Calculator or use the calculator found in most tax preparation software packages.
Jason Alderman directs Visa’s financial education programs. To participate in a free, online Financial Literacy and Education Summit on April 23, 2012, go to www.practicalmoneyskills.com/summit2012.
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Knowing Which Financial Records to Save, Toss
April 9, 2012
By Jason Alderman
If the memory of hours spent hunting for and organizing paperwork to file your taxes is still fresh, think about doing some financial spring cleaning so next year’s tax preparation won’t be such an ordeal.
Many people hold onto mounds of receipts and account statements because they’re not sure when it’s safe to toss them. (By toss, I mean shred – don’t give identity thieves any ammunition.) Here’s when you wouldn’t want to lack proper documentation:
- If audited by the IRS you must be able to justify deductions, charitable contributions, income, etc.
- Track stock and fund transactions so when you sell you’ll only be taxed on profits above the purchase amount; also to justify claiming a loss on your taxes.
- To claim tax credits/deductions for home improvements, such as energy-efficiency upgrades or for medical reasons.
- If you make nondeductible (after-tax) contributions to an IRA or 401(k), to prove you’ve already paid taxes on the amount.
- Your heirs will need your financial documents to settle your estate.
The IRS has several periods of limitations during which you can be asked to produce records proving income, deductions or credits you claimed:
- Normally, they have up to three years after your tax return to request documentation.
- However, if you failed to report income that is more than 25 percent of the gross income on your return, they have six years.
- If you file a claim for losses from worthless securities, it’s seven years.
- If you don’t file a return or file a fraudulent return, there is no statute of limitations.
So, you should probably hold onto back-up documentation for seven years, to be safe. These records include:
- W-2 and 1099 income forms.
- Year-end bank and brokerage statements showing interest earned.
- Receipts, cancelled checks or other proof of payment for deducted expenses.
- Home purchase or closing statements, insurance records and receipts for improvements.
- Homeowners, car and medical insurance claim payouts.
- Investment statements (stocks, bonds, mutual funds retirement accounts, etc.)
IRS Form 552 contains detailed instructions on what to save and for how long (www.irs.gov).
Hold onto certain documents for even longer than IRS audit requirements. For example:
- Keep records for investments and major assets at least as long as you own them.
- Save records and tax forms relating to retirement accounts, at least until you’ve drained their balances.
- Toss monthly and quarterly loan statements after receiving year-end summaries, but always retain final payoff notices in case the loan erroneously goes into collection and you need proof.
- Save all tax returns and attachments (Schedules, W-2 form, etc.) indefinitely. The same goes for hard-to-replace personal documents such as birth, marriage and death certificates, divorce, adoption and military discharge papers, will, power of attorney, etc.
You can always save actual documents and receipts. But if your goal is to reduce paper clutter, scan copies and save as PDF files. Back up electronic “soft copies” on an encrypted flash drive or external hard drive in case your computer crashes. And, if you’re worried about fire, theft or other disasters, store additional copies in a safety deposit box or with a trusted friend.
Recordkeeping is no fun, but compared to tearing the house apart to prepare for an audit, it’s a small price to pay.
Jason Alderman directs Visa’s financial education programs. To participate in a free, online Financial Literacy and Education Summit on April 23, 2012, go to www.practicalmoneyskills.com/summit2012.
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Using Comic Books to Teach Financial Literacy
April 2, 2012
By Jason Alderman
For decades, millions of kids have faithfully followed the adventures of their favorite comic book superheroes like Spider-Man and the X-Men – sometimes well into adulthood. Although often considered pure escapism, comic books also can serve an educational role – whether it’s teaching the principles of science, demonstrating right vs. wrong or even helping kids learn how to read.
Personal financial management is one of those important, yet admittedly dull, subjects parents want to teach their kids, but sometimes avoid – maybe they feel they don’t know enough about it, or are afraid family financial secrets will be shared on the playground. As I learned firsthand growing up in a household where finances were never discussed, learning about money through the school of hard knocks is mighty unproductive – and expensive.
As a way to introduce children to basic money concepts in a kid-friendly format, Marvel Comics and my employer, Visa Inc., recently collaborated on a new comic book called Avengers: Saving the Day. The plot follows the world's most popular superheroes, including Spider-Man, Iron Man, Thor, Hulk and Black Widow, as they learn valuable lessons about managing personal finances while foiling an attempted bank heist by the arch villain, Mole Man.
Ideally, children develop financial skills they’ll need in adulthood while still in school – things like balancing a checkbook, filing taxes and managing credit cards. But in reality, despite the increasing number and complexity of financial decisions today’s consumers face, only a handful of states mandate financial literacy courses as a condition for graduating high school.
That’s where comic books can help. As Marvel Comics editor Bill Rosemann explained, "In an uncertain world, understanding how to save and properly budget your hard-earned money is one of the keys to personal success. The Avengers are not only the world's greatest heroes, but they also know a thing or three about financial health. After all, Iron Man hasn't managed his vast wealth of Stark Enterprises by accident, and as Spider-Man learns in this story, you don't have to be a millionaire to be a saving hero.”
Avengers: Saving the Day was created by a renowned team of Marvel storytellers and is available for free, in both print and online editions, at Practical Money Skills for Life, a free personal financial management program run by Visa (www.practicalmoneyskills.com/avengers). It’s available in Arabic, Bahasa Indonesia, Chinese, English, French, Portuguese, Russian and Spanish. A free teacher’s guide with lesson plans suitable for grades 2 to 7 is also available at the site.
Comic books aren’t the only kid-friendly way to teach financial literacy. Studies have shown that the key components of good video games – including immediate feedback, rewards, motivation and goal-setting – may do a better job of preparing today’s kids for the modern, high-technology, global world in which they live than the more traditional types of learning often found in the classroom. A good example is Financial Football, which combines the NFL’s structure and rules with hundreds of questions of varying difficulty designed to test students’ financial knowledge (www.practicalmoneyskills.com/football).
Bottom line: Kids learn more when their imagination is engaged, so look for well-designed educational comic books, video games and toys to supplement more traditional learning tools.
Jason Alderman directs Visa’s financial education programs. To participate in a free, online Financial Literacy and Education Summit on April 23, 2012, go to www.practicalmoneyskills.com/summit2012.
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Pros and Cons of Cosigning a Loan or Credit Card
March 26, 2012
Credit can be hard to come by these days. Stricter regulations mean that most financial institutions take a closer look at a potential borrower's credit history and their ability to repay than they have in the recent past. One solution some consumers turn to is getting someone with better credit to cosign the loan or credit card. If someone approaches you to cosign for them, here are a few things to take into consideration before you sign on the dotted line:
Cons:
The loan you cosign will appear on your credit report, so your credit score may go down if your debt ratio becomes too high. The debt becomes yours in every way, meaning if the person misses a payment, the lender or collection agency may come to you for payments. If the person defaults on the loan, you can be sued for the full amount of the loan plus collection fees, late fees, interest and attorney fees.
If neither of you can make the payments, the lender can repossess your belongings (such as a car or house) to cover the debt. Even if the person you cosigned for declares bankruptcy and discharges their responsibility to the debt, you as the co-signer are not protected and must still repay.
Pros:
There are a few circumstances where cosigning a loan or credit card can be a good idea. Cosigning allows you to help someone else obtain credit they would not otherwise have access to. One of the most common situations in which a loan or credit card is cosigned is a parent cosigning for their child. This is often for college loans or an emergency credit card. By cosigning your child's school loan, you may be able to get a more favorable interest rate than if your student signed alone.
Weigh your options carefully when deciding whether or not to cosign on a loan or credit card. No matter how much the other person needs the credit, make sure you make the right choice for your financial situation!
Put your tax refund to work
March 26, 2012
By Jason Alderman
If you’re among the millions of Americans expecting an income tax refund this year, you’ve probably already filed your 2011 return and are eagerly awaiting the money. But if you haven’t already mentally spent your refund on a guilty pleasure, here are several great ways to better put that money to work for you:
Pay down debt. Beefing up credit card and loan payments can significantly lower your long-term interest payments. Suppose you currently pay $120 a month toward a $3,000 credit card balance at 18 percent interest. At that pace it’ll take 32 months and $788 in interest to pay off, assuming no new purchases. By doubling your payment to $240 you’ll shave off 18 months and $441 in interest.
Start an emergency fund. To protect your family against the impact of a layoff or other unexpected financial crisis (e.g., medical emergency, major car repair, theft), set aside enough cash to cover six to nine months of living expenses. Seed the account with part of your refund and then set up automatic deductions from your paycheck or checking account.
Boost retirement savings. Beef up your 2012 IRA or 401(k) contribution, especially if your employer offers matching contributions; a 50 percent match corresponds to a 50 percent guaranteed rate of return – something you won’t likely find in any investment.
Spend now to save later. Reap long-term savings on things you’ll eventually pay for anyway:
- Replace older appliances with energy-efficient models that will pay for themselves through lower utility bills. For example, replacing a 1980s refrigerator with an Energy Star model will save over $100 a year. The Energy Star website (www.energystar.gov) can help you find Energy Star products and estimate savings.
- Switching from traditional light bulbs to energy-efficient alternatives like CFLs and LEDs, while initially more expensive, can save about $6 per bulb in annual energy costs. Just make sure they are Energy Star-qualified models, which exceed minimum standards.
- Schedule routine car maintenance. According to AAA, simply changing your car’s air filter once a year can save over $270, while replacing older spark plugs can save $540 in wasted fuel.
- Ask whether your utility offers free or subsidized home energy audits. An audit will reveal which investments – such as increasing home insulation and replacing drafty windows and doors – will lower both winter and summer energy bills.
Finance education. Strengthen your career prospects and earnings potential by adding new skills through college courses or vocational training. Ask if your employer will help pay for job-related education. You can also set money aside for your children’s or grandchildren’s education by contributing to a 529 Qualified State Tuition Plan or Coverdell Education Savings Account. Bonus: Your contributions will grow tax-free until withdrawn.
Prepay bills. If you expect major expenses later this year (e.g., insurance premiums, orthodontia, college tuition), start setting money aside now so you won’t rack up interest charges later. Also, paying slightly more each month toward your mortgage principal can save thousands of dollars in interest over the life of the loan.
And finally, if you regularly receive large tax refunds, you’re probably having too much tax withheld from your paycheck – you’re essentially giving the government an interest-free loan. Ask your employer for a new W-4 form and recalculate your withholding allowance.
Jason Alderman directs Visa’s financial education programs. To participate in a free, online Financial Literacy and Education Summit on April 23, 2012, go to www.practicalmoneyskills.com/summit2012.
Financial impact of adoption
March 19, 2012
By Jason Alderman
It’s hard to think of any act more generous than adopting a child. Many adoptive parents I know tell me it’s the most personally rewarding thing they’ve ever done.
But adoption isn’t cheap. Related expenses can quickly mount to tens of thousands of dollars. And sadly, sometimes adoptions do fall through, forcing prospective parents to endure the process – and expense – all over again.
Fortunately, the IRS provides significant tax incentives for people who adopt, including the adoption tax credit and an exclusion from taxable income for expenses paid through an employer’s adoption assistance program.
Several IRS rules policies and dollar limits for adoption tax credits and exclusions have changed for 2012:
Depending on your income level, you may be able to claim a non-refundable tax credit for up to $12,650 for qualified expenses paid to adopt an eligible child. A few adoption credit rules and definitions:
- The adoption credit is per child; thus the amount doubles if you adopt two children in the same year.
- For your adoption expenses to be eligible, the child must be under age 18 or physically or mentally unable to care for himself or herself.
- “Non-refundable” means you can claim a credit for only up to the tax amount you owe.
- “Qualified adoption expenses” include adoption fees, court costs, attorney fees and travel expenses (including meals and lodging while away from home). See IRS Form 8839 at www.irs.gov for details.
- If your modified adjusted gross income is $189,710 to $229,710, the credit amount you can claim gradually reduces; over $229,710, you cannot claim any credit.
Families who adopt special needs children are entitled to claim the full $12,650 credit, even if their out-of-pocket expenses were less than that amount. “Special needs children” are those the state determines cannot or should not be returned to their parent’s home and who probably won’t be adopted unless assistance is provided. This group may include older children, siblings, children with disabilities and those currently in foster care.
If the child is a U.S. citizen or resident alien, the following rules apply for both successful and failed adoptions:
- For expenses paid before the adoption is final, take the credit on the following year’s tax return.
- For expenses paid in the year the adoption is finalized, take the credit on that year’s return.
- For expenses paid in the year after finalization, take the credit in the year paid.
- Because it’s nonrefundable, if the credit due to you exceeds a given year’s tax liability, you may carry any remaining credit forward for up to five years, until you’ve used it up.
If the child you adopt is a foreign national, you may only claim the tax credit or exclude employer-paid benefits after the adoption has become final. In addition, if the adoption is ultimately unsuccessful, you cannot collect the credit for those expenses.
In addition to the tax credit, you also may be able to exclude from your gross income for tax purposes any employer-paid amounts under a qualified adoption assistance program, whether paid to you or a third party. See Form IRS 8839 for details.
Adoption should not be entered lightly. A good place to start your research is the government’s Child Welfare Information Gateway at www.childwelfare.gov.
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A financial to-do list for the recently widowed
March 12, 2012
By Jason Alderman
Losing your spouse is one of life’s most stressful events. Ironically, it’s during that time of grief, when you’re probably not thinking clearly or focusing on such matters, that you’re expected to make many important financial decisions that will impact the rest of your life.
Although there are certain actions you must take right away to ensure your current financial security, several major decisions with long-term consequences should probably be postponed until you’ve had a chance to reflect on how – and where – you want to spend the rest of your life.
If your spouse primarily handled the finances or you’re not up to the task alone, ask a trusted relative or friend to help you sort out the following information:
- Gather legal and financial documents that will give a better sense of where you stand financially, including: wills, trusts and powers of attorney; mortgage and car title; tax returns; bank, loan and credit card statements; safe deposit box contents; insurance plans; and income sources.
- Compile outstanding bills and monitor due dates to avoid late charges or penalties for: utilities; mortgage/rent; health, auto and homeowners insurance premiums; car, student and personal loans; and credit cards.
- If your spouse was still working, contact his or her employer regarding unpaid salary, benefits, life insurance and retirement accounts. This is particularly important if they provide your health insurance.
Other critical actions to take within the first month or two include:
- Contact companies where you have joint accounts and convert them to your name only. Also close any accounts that were in his or her name only that you don’t wish to maintain.
- If your spouse was eligible for Social Security, you and your children may qualify for Survivor Benefits. Call (800) 772-1213 or visit www.ssa.gov.
- Similarly, if your spouse was a veteran, contact the VA regarding possible survivor benefits (www.vba.va.gov/survivors).
- Pay attention to income tax filing dates, particularly if you file quarterly estimated taxes. While the IRS may waive penalty fees on a late filing or underpayment related to your spouse’s death, you’re still responsible for any taxes or interest owed. Call 800-829-1040 or read “Filing Late and/or Paying Late” at www.irs.gov.
Don’t make irreversible financial decisions until you’ve had a chance adjust to your new status. For example, some people rush to pay off their mortgage, only to discover later that the house is too large or they can’t afford the taxes and upkeep. Others feel pressured to move closer to family members, only to discover that they miss their former life.
Other long-range planning suggestions:
- Rewrite your will and other documents that outline how you’d like your financial and health matters handled if you die, become disabled or become seriously ill.
- Until you have a better handle on your new living expenses, live frugally – especially if you’re used to having two incomes.
And finally, an update on my recent column about repaying overdue income taxes. The IRS just announced that for 2011 taxes due April 17, 2011, it will offer a six-month grace period on failure-to-pay penalties for certain taxpayers facing economic hardship. They also doubled the threshold for filing a streamlined installment repayment agreement (where you don’t have to supply a detailed financial statement) from $25,000 in taxes owed to $50,000.
Jason Alderman directs Visa’s financial education programs. To participate in a free, online Financial Literacy and Education Summit on April 23, 2012, go to www.practicalmoneyskills.com/summit2012.
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Can’t Pay Your Taxes? Try These Tips
March 5, 2012
By Jason Alderman
If you’re worried you won’t be able to pay your income taxes by this year’s April 17 filing date, don’t panic; but don’t ignore the deadline and certainly don’t wait for the IRS to reach out to you first. Acting quickly not only gives you more repayment options, it can also significantly lower penalties you might owe the government.
By not filing your 2011 federal tax return or asking for an extension by April 17, 2012, the penalty on any taxes you owe increases dramatically – usually an additional 5 percent of taxes owed for each full or partial month you’re late, plus interest, up to a maximum penalty of 25 percent. But file your return/extension on time and the penalty drops tenfold to 0.5 percent.
Eventually, the IRS could even place a tax lien on your assets and future earnings.
IRS tax repayment alternatives include:
Pay by credit card. You will be charged a small convenience fee that is tax-deductible if you itemize expenses. Just be sure you can pay off your credit card balance within a few months, or the interest accrued might exceed the penalty.
Short-term extension. If you can pay the full amount within 120 days, call the IRS at 800-829-1040 and ask whether you qualify for a short-term extension. If granted, you’ll still owe interest but will avoid an application fee.
Installment agreement. If you need longer, an installment agreement will let you pay your bill in monthly installments for up to five years. If you owe $10,000 or less, you’re guaranteed an installment agreement provided you have filed and paid all taxes for the previous five years and haven’t had an installment agreement within that time.
If you owe $25,000 or less and are in good standing, you’ll still likely qualify for a streamlined installment agreement; over $25,000 you still may qualify, but may be required to file a detailed Collection Information Statement.
There’s a $105 fee to enter an installment agreement. It’s reduced to $52 if you set up a direct debit installment plan (or $43 for low-income filers). For rules and to apply, see the “Online Payment Agreement Application” at www.irs.gov or submit IRS Form 9465.
Offer in Compromise. Under certain dire financial-hardship circumstances, the IRS may allow taxpayers with annual incomes of up to $100,000 to negotiate a reduction in the amount they owe through an Offer in Compromise.
To qualify, you must be current with all filing and payment requirements and not in bankruptcy. There is a $150 non-refundable application fee, which may be waived for low-income applicants. You’ll also be required to submit an initial payment with your application.
Please note: Only a small number of offers in compromise are accepted and you should only pursue one after having exhausted all other payment options. For step-by-step instructions, read the IRS Form 656 Booklet.
If you’re unable to make payments on your installment agreement or offer in compromise, call the IRS immediately for alternative payment options, which could include reducing the monthly payment to reflect your current financial condition.
Nothing beats staying current on your taxes, but if you fear you may fall behind, explore these options before the penalties start snowballing.
Jason Alderman directs Visa’s financial education programs. To participate in a free, online Financial Literacy and Education Summit on April 23, 2012, go to www.practicalmoneyskills.com/summit2012.
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Empty Homes Need Additional Insurance
February 27, 2012
By Jason Alderman
There are many reasons why someone might leave their home unoccupied for months at a time: Maybe you moved to another state and your old house is languishing on the market; or you can no longer afford your mortgage so you’re working out a short sale and couch-surfing at your sister’s house; or you struck it rich and are taking a six-month, around-the-world cruise.
In each case, there’s one very important person you should call well before locking the door that last time – your insurance agent.
“Many people don’t realize that their standard homeowners policy won’t provide full coverage if their home sits unoccupied for a certain amount of time,” says Ruth Stroup, a Farmers Insurance Group agent from Oakland, Calif. “The timeframe varies by state and insurance carrier, but typically it’s 30 or 60 days. After that, you could be liable for losses related to theft or vandalism.”
Unoccupied or vacant homes are considered a higher risk by insurers because no one lives on site to maintain and protect the property. We’ve all seen news reports of abandoned or foreclosed homes that have been stripped of their fixtures, overrun by squatters or simply vandalized.
Also, if you’re hoping that your insurer simply won’t notice your house is unoccupied, think again. As Stroup points out, “Insurance companies increasingly are doing routine inspections at policy renewal time. If they find that the property is unoccupied, chances are your policy won’t be renewed.”
So what should you do if you find yourself in this situation? First, check your homeowners policy for language regarding unoccupied or vacant homes. Once you know that your house will be empty for more than the allowable time – and before the deadline passes – contact your insurer to find out whether they offer vacant home insurance. They may be willing to make special provisions depending on the projected duration of vacancy. If your carrier doesn’t offer such coverage, find one that does.
Foreclosure or short sale. This is grim but critical information to know if you’re losing your home through a foreclosure or short sale: Even if you’ve already moved out, you’re still responsible for insuring the property until you no longer officially own it. “If a prospective buyer slipped and fell, you’d be liable for damages since you’re still technically the owner,” says Stroup.
Landlord insurance. Many homeowners prefer to rent out their property until the real estate market rebounds. From the insurer’s perspective, this is preferable to leaving the house vacant, although it’s still considered riskier coverage because tenants are less likely than owners to protect and maintain the property.
Landlord insurance covers the structure of the building as well as any personal belongings you leave on the premises against hazards such as fire, water damage, lightening, etc. It will reimburse you for lost rental income if the home becomes uninhabitable.
“Landlord policies are structured differently than homeowners coverage but often cost about the same,” says Stroup. “Homeowners policies typically provide considerable coverage for personal property, which you probably wouldn’t need here because your renters are responsible for insuring their own things.”
To protect your current and future assets, always have sufficient loss and liability insurance on all your property and possessions. Better safe than sorry.
Jason Alderman directs Visa’s financial education programs. To participate in a free, online Financial Literacy and Education Summit on April 23, 2012, go to www.practicalmoneyskills.com/summit2012.
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Can Your Family Afford College?
February 20, 2012
By Jason Alderman
I’m a firm believer that the more knowledge you acquire, the richer your life will be. But as college tuition and fees continue to skyrocket, students and parents increasingly are asking, “Is a degree really worth the cost?”
For many people it certainly is: On average, college graduates earn $550,000 more than high school grads over a lifetime, according to a Pew Research Center study. Not only that, the current unemployment rate among college grads is only half that of high school grads.
So, assuming your kid is interested in college, ask yourself, “How much can we afford to spend without digging ourselves into a hole?” Unless you started socking away money long ago or Junior can count on a full-ride scholarship, you’ll probably need to take out student (and parent) loans to pay for that degree.
Tread carefully so you’re not saddled with too much debt. Here are a few factors to remember:
Not all degrees are created equal. The average college graduate now carries roughly $25,000 in student loan debt, but many families rack up far more, especially if they have several children. Students should follow their passions – in education and in life – but remember, someone with a degree in engineering or computer sciences will probably garner much higher pay and more easily pay off loans than graduates in lower-paying fields like education.
In other words, don’t take on debt that will overwhelm your future ability to pay it off. To save money, many students start out at a community college then transfer to a four-year institution.
Calculate college’s true cost. As with buying a car, when tallying a college’s true cost there’s the sticker price – the stated full cost for tuition, fees, room and board, etc. – and there’s the net cost you’ll actually pay after subtracting grants, aid, work study and other adjustments that may apply.
Thanks to a new federal law, all post-secondary institutions must post a “net price” calculator to help families more accurately estimate the true costs of attending, based on the student’s individual situation. Colleges may either use the Department of Education’s basic calculator template or develop their own if they require additional information.
Although you won’t be able to do exact comparisons, the new calculators do provide a good starting point for estimating the true costs of various colleges. Indeed, some students find that because of financial incentives offered, such as grants, merit-based scholarships and low-income subsidies, they can actually afford schools they’d previously ruled out. Expensive private schools sometimes end up cheaper than comparable state schools.
Another good comparison tool is the Department of Education’s College Navigator (http://nces.ed.gov/collegenavigator), which lets you search for details about colleges throughout the U.S., including tuition and housing costs, majors and degrees offered and typical SAT scores of students attending. You can even build a list of schools for side-by-side comparisons.
Fill out a FAFSA. Even if you think your income’s too high to qualify for financial aid, you still should fill out the Free Application for Federal Student Aid (FAFSA), since it’s also required by virtually all institutions for access to federal student loans. Federal loans generally have more favorable interest rates and repayment terms than private loans so it’s best to exhaust those alternatives first.
Jason Alderman directs Visa’s financial education programs. To participate in a free, online Financial Literacy and Education Summit on April 23, 2012, go to www.practicalmoneyskills.com/summit2012.
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Financial intervention for your parents?
February 13, 2012
By Jason Alderman
Sometimes it’s hard enough just keeping track of your own finances. But, as many of us have learned, life gets even more complicated when your parents come to you for assistance with their money matters – or worse, when they don’t ask for help but really should.
Many people are fiercely independent and hate to relinquish control over any aspect of their lives, especially personal financial matters. Some are downright suspicious when anyone, including their own children, tries to intercede.
But don’t give up. Try to become familiar with your parents’ financial, medical and legal records while their health and finances are still in good shape so you’ll be able to spot any warning signs that something’s amiss.
Indicators that your parents might need a hand include:
- Unpaid bills, late payment notices or utility shut-off warnings.
- Calls or letters from creditors or collection agencies.
- They’ve had to choose between filling prescriptions and buying food, utilities or other necessities.
- Unlikely magazine subscriptions or cheap prizes – signs they may be targets of telemarketing or get-rich-quick schemes.
- Seemingly unnecessary home improvements; or conversely, signs that they can’t afford needed repairs.
- Uncharacteristically lavish spending on vacations, new cars, etc.
If your parents initially are reluctant to share their financial and legal information, tell them you’re working on your own financial planning (budgeting, creating a will, retirement savings, etc.) and would like their advice. That will lead naturally to discussions about their own plans. Or, bring in an impartial party, such as an attorney, financial planner, social worker or trusted friend to guide the conversation.
Offer to help your parents organize their finances. Set up and periodically update files containing:
- Details of all major possessions and relevant paperwork (such as property deeds, car registration, jewelry, etc.).
- Outstanding and recurring debts (mortgage, car loan, medical bills, utilities, etc.).
- All income sources, including Social Security, pension, 401(k), IRA, investment accounts and savings.
- Bank accounts, credit cards, safe deposit box contents and insurance policies, including password, agent and beneficiary information.
- Will, trust, power of attorney, health care proxy, funeral plans and other documents showing how they want their affairs handled.
- Contact information for their lawyer, accountant, broker, financial planner, insurance agent and other advisors.
A few other tips:
- Help your parents create a detailed budget so they always know how much money is coming in and going out. Free budgeting tools are available at www.mymoney.gov, the National Foundation for Credit Counseling (www.nfcc.org), www.mint.com, and Practical Money Skills for Life, a free personal financial management program run by Visa Inc. (www.practicalmoneyskills.com/budgeting).
- If you’re helping pay or process their bills, request that duplicate account statements be sent to you as well, so you can quickly spot any errant activity.
- Set up automatic bill payment for utilities and other monthly bills to avoid late payment fees. Just make sure the account is always sufficiently funded.
- Many retirees must file quarterly tax returns – a daunting task for anyone. Offer to help with the paperwork; or, if they work with an accountant or tax preparer, ask to attend the next meeting.
Don’t be afraid to ask your parents if they need help managing their finances. Chances are, in 30 years you’ll thank your own kids for the offer.
Jason Alderman directs Visa’s financial education programs. To participate in a free, online Financial Literacy and Education Summit on April 23, 2012, go to www.practicalmoneyskills.com/summit2012.
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Take ‘America Saves Week’ to heart
February 6, 2012
By Jason Alderman
After four years of coping with a stagnant economy, probably the last thing you want to hear is how important it is to sock away money for a rainy day – you already know that. But hear me out, just in case.
Those who struggle with long-term unemployment or under-employment often simply don’t have spare cash available to save. Others, worn out by years of being frugal, just want to buy things again.
Even as we wait for economic recovery it’s still good to remember – or perhaps learn for the first time – why saving is so vital:
- You could lose your job or see your wages cut. Most financial experts recommend having at least six to nine months’ income saved for emergencies, but even $500 could help bail you out of a sticky situation.
- Medical care, retirement and college tuition far outpace inflation. In fact, the average college graduate now carries $25,000 in outstanding loans – debt that can’t be discharged through bankruptcy and has no statute of limitations.
- If you’re approaching or in retirement, your net worth has probably been hammered by plummeting home and retirement account values in recent years.
- If nothing else, you can teach your children good financial habits that will serve them well during hard times.
So where can you learn sound savings habits? One great resource is America Saves (www.americasaves.org), a national campaign sponsored by more than 1,000 non-profit, government and corporate organizations. Their goal is to encourage people from all income levels to save money and build personal wealth using their free financial tools, savings services, advice and other resources, including:
- A Personal Wealth Estimator that helps you calculate your current net worth and estimate your future net worth.
- Monthly Savings Messages from national financial experts on topics such as money management, investment basics, building wealth through home ownership, saving during tax time and getting out of debt.
- Tips for saving money on everything from groceries to utilities to insurance premiums.
- Links to numerous websites offering financial education materials.
Last year, more than 2,000 organizations, including non-profits, employers, government agencies, educational institutions and unions participated in the fifth annual America Saves Week, reaching millions of Americans – everything from local banks offering low-fee savings accounts and higher-rate CDs to new savers, to free tax preparation assistance and credit counseling, to worldwide Military Saves drives to encourage savings by military families.
This year’s America Saves Week, “Set a Goal, Make a Plan, Save Automatically,” is slated for February 19-26, 2012.
Here are some great ways to start saving that first $500:
- Direct deposit part or all of your federal tax refund into a savings account or savings bond.
- Avoid overdraft and late fees by regularly monitoring your bank and credit card accounts.
- Brown-bag it to work more often. If you saved $5 a week, you’d be half-way there.
- Kick bad habits. Smoking a pack of cigarettes a day might cost $2,000-plus a year.
- If you have low-deductible homeowners, renters or auto insurance, consider raising the deductible to $500 or $1,000. Many save 15 to 30 percent or more on their premiums.
Saving can be a tough habit to start, but once you’re hooked, you’ll never go back.
Jason Alderman directs Visa’s financial education programs. To participate in a free, online Financial Literacy and Education Summit on April 23, 2012, go to www.practicalmoneyskills.com/summit2012.
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Talking Finances with Your Valentine
January 30, 2012
By Jason Alderman
As you and your spouse celebrate Valentine’s Day over a candle-lit dinner, you may want to avoid romance-killing topics like, “Honey, let’s talk about our financial future.” But you really should have that conversation sooner rather than later to keep your relationship on a healthy footing.
Major life changes may require you to reassess how you manage the family finances. Unfortunately, many couples don’t make time to plan ahead and are later caught off guard around issues like having children, aging parents, planning for emergencies and changing career and retirement goals.
If you haven’t had a financial heart-to-heart lately and aren’t sure what to do next, here are a few suggestions:
Make a financial “date.” Even if you’re in complete agreement on money matters, the family “accountant” should keep his or her spouse in the loop – if nothing else, so they can easily take over in an emergency. Set up regular meetings to discuss bill payments, progress or setbacks regarding savings goals, budgeting for upcoming expenses, and strategies for coping with unforeseen expenses.
Don’t postpone uncomfortable discussions. Should one of you accidentally bounce a check or miss a payment, don’t wait until your next powwow to address it or try to hide the problem. You’ll only make matters worse and create an atmosphere of mistrust. Fess up and deal with the issue right away – you might even save yourself additional late fees or penalties.
Be united. When the news isn’t good – say your 401(k) balances tanked last quarter or one of you got laid off – communication is all the more important. Whether you need to temporarily tighten the budget or make a major life-altering decision like postponing retirement, talk it through and be prepared to compromise so neither party becomes the bad guy.
Reaffirm your goals. Couples often start out with one game plan but then life deals an unexpected hand and goals change. Touch base periodically on how you both feel about such major issues as family size, home ownership, career changes, financing college for your kids (or yourselves), financial risk appetite, when and where you’ll retire, and taking care of elderly parents.
Update legal documents. Make sure your legal and financial documents are up to date and reflect your current wishes, including wills, financial and medical powers of attorney, life insurance policies, retirement accounts, investment funds and any other accounts where beneficiaries or people who control your health or finances are named.
Follow your budget. Some of the worst marital disagreements occur when one or both parties sabotage the family budget. If you don’t already have a budget, many free tools are available. Check out the U.S. Treasury Department’s www.mymoney,gov, www.mint.com and Practical Money Skills for Life, a free personal financial management site run by Visa Inc. (www.practicalmoneyskills.com).
Seek help. If you discover that you’ve gotten off track or need help realigning your financial goals, a number of outside resources are available:
- The NFCC can help you locate a free or low-cost credit counselor.
- You can find a financial planner or advisor through the Financial Planning Association (www.fpnet.org), the Certified Financial Planner Board of Standards (www.cfp.net), or the National Association of Personal Financial Advisors (www.napfa.org).
Jason Alderman directs Visa’s financial education programs. To participate in a free, online Financial Literacy and Education Summit on April 23, 2012, go to www.practicalmoneyskills.com/summit2012.
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Tax strategies in a tough economy
January 22, 2012
By Jason Alderman
For most of us, income tax calculations don’t change much from year to year. But thanks to the roller coaster economy of the past few years, many people have undergone major life changes that can have a significant impact – good or bad – on their taxable income and how they should file taxes.
Even though April 17 (this year’s tax-filing deadline) is a ways off, it’s never too soon to start planning your strategy, particularly if you experienced financial hardships in 2011 that could affect your taxes. The IRS has a handy guide called “The What Ifs of an Economic Downturn” (search www.irs.gov) that reviews the tax impacts of different scenarios such as job loss, debt forgiveness or tapping a retirement fund.
Here’s a roundup of common economic challenges you may be facing and their possible tax implications:
You lost your job. Remember that unemployment benefits, severance pay and payout of accumulated vacation or sick leave are all considered taxable income, so if you didn’t have taxes withheld from these payments, be prepared for a potentially nasty tax bill.
If you withdrew money from your regular IRA or 401(k) account to cover expenses, you’ll owe income tax on the amount, plus an additional 10 percent penalty unless you’re over age 59 ½ or meet special circumstances. Also, outstanding 401(k) loans must be repaid (usually within 60 to 90 days of termination) or they’ll be counted taxable income – plus be subject to the same 10 percent penalty.
The good news is that many public assistance benefits such as welfare, food stamps and disaster relief payments don’t count toward taxable income. Read the IRS’s “Tax Impact of Job Loss” for details (www.irs.gov/pub/irs-pdf/p4128.pdf).
Lowered income. If you took a big pay cut or lost your job in 2011, it might lower your adjusted gross income (AGI) enough to qualify for the Earned Income Tax Credit (EITC). EITC is a “refundable” tax credit, which means that if you owe less in income tax than your eligible credit, you’ll not only pay no tax, but actually get a refund for the difference. To learn more, search EITC at www.irs.gov.
Forgiven debt. Many people don’t realize that when you borrow money from a bank or other commercial lender and the lender “forgives” the debt, you generally must count the forgiven amount as taxable income.
There are several exceptions to the rule, however: For example, the Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude up to $2 million in forgiven mortgage debt ($1 million if married filing separately) on their principal residence if it came through mortgage restructuring, foreclosure or a short sale. The mortgage exclusion is set to expire at the end of 2012 unless Congress intervenes.
Other exceptions include: Debts discharged through bankruptcy; or, if you are insolvent when the debt is cancelled, some or all of it may not be taxable. (Insolvency means your total debts are greater than the fair market value of your total assets.) For more information, search for Mortgage Debt Forgiveness at www.irs.gov.
Taxes are the last thing you want to worry about when facing financial hardships. Just be sure you’re prepared for the possible tax implications if your income or debt situation has changed in the past year.
Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.
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Beware of mystery shopper scams
January 16, 2012
By Jason Alderman
Getting paid to go shopping may sound like a dream job, but buyer beware: For each legitimate mystery or secret shopper opportunity, probably hundreds more are scams. In fact, the National Consumers League (NCL) says complaints regarding fraudulent mystery shopper and work-at-home schemes were up nearly 9 percent during the past six months.
Why the increase? It’s due in part to our nation’s high unemployment rates and how desperate people are to earn money while seeking full-time employment. Plus, many people are lured by offers that sound too good to be true (and are).
Here are tips for spotting bogus mystery shopper programs:
Many retailers hire marketing research companies to gauge their employees’ quality of customer service. Those companies in turn hire mystery shoppers to make purchases anonymously and fill out questionnaires documenting their experience. Many research firms belong to the Mystery Shopping Providers Association (www.mysteryshop.org), a trade organization that links businesses with mystery shopping providers. (MSPA also provides a search engine where people can register for mystery shopping assignments.)
Unfortunately, scammers increasingly are using newspaper and Internet job ads, emails and phone calls to snare unsuspecting consumers with promises of quick, easy money for minimal effort. Here’s how a typical mystery shopping scam might work:
You answer an ad and are “hired” as a mystery shopper to evaluate its clients’ businesses. The company sends an official-looking employment packet containing the business evaluation forms you’ll supposedly use. But first, you’ll be required to complete a so-called training assignment to make sure you’re a suitable employee. That’s where the fraud comes in:
- The company claims it’s evaluating a money transfer service like Western Union.
- They send you a large check with instructions to deposit it in your personal checking account.
- You are told to keep a certain amount as your fee and then to pose as a customer by wiring the balance to a third party – usually within 48 hours.
- You then submit a report about your customer experience.
What you may not realize is that the original check was fake. Scammers know that by law, banks generally must make deposited funds under $5,000 available within a few days. They count on your completing the transaction before the check has been cleared by the issuing bank, which may take several weeks. Once your bank discovers the fraud, it will bounce the check and you are on the hook for the whole amount you wired – plus your wasted time.
Common red flags include:
- Legitimate companies will never ask you to send a money transfer for any purpose.
- Legitimate companies don’t charge shoppers a fee to work for them.
- Be suspicious if you’re hired on the basis of an email or phone call without any interview or background checks.
- Companies that promise you can make a lot of money as a mystery shopper are almost certainly scams.
- If mystery shoppers are asked to make purchases, it’s usually for very small amounts for which they will be reimbursed.
- Mystery shoppers are paid after completing their assignments and returning the questionnaires. Shoppers never receive checks upfront.
Good resources to learn more about bogus mystery shopper and other fake check scams, include the FBI (www.fbi.gov/scams-safety), the Federal Trade Commission (www.ftc.gov), the Consumer Federation of America (www.consumerfed.org), and the National Consumers League (www.fakechecks.org/index2.html).
Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.
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Women and personal finances
January 9, 2012
By Jason Alderman
By many measures, women’s lives have changed substantially in recent decades. According to a comprehensive government report called “Women in America” (www.whitehouse.gov/data-on-women), although certain social and economic situations for women have improved, when it comes to personal finances, many women still face challenging hurdles.
Key report findings include:
- Women live longer than men but are much more likely to experience critical health problems that hamper their ability to work – and to pass up needed care due to cost.
- Although the earnings gap between women and men continues to narrow, it’s still significant: Among full-time workers, women’s weekly earnings as a percentage of men’s have increased from 62 percent in 1979 to 80 percent in 2009.
- More women than men now graduate high school and college, but far fewer earn degrees in engineering, computer sciences and other higher-paying fields.
- Women increasingly marry later, have fewer children or remain childless, yet still are more likely to live in poverty, particularly single-mother families.
- Women are less likely than men to work outside the home (61 percent vs. 75 percent in 2009) and are much more likely to work part-time and to take time off to raise children or care for aging relatives.
In a nutshell: Women generally earn less and live longer than men, so at retirement they often have less in savings, receive smaller retirement and Social Security benefits and must spread out their money longer. Clearly, women need to take charge of their financial wellbeing. Here are a few places to start:
Develop a budget to track income and expenses. Either download a budget spreadsheet template or investigate software packages and online account management services like Quicken (www.quicken.com), Mint.com (www.mint.com), Yodlee (www.yodlee.com) and Mvlopes (www.mvlopes.com).
Plan for retirement. Time is your biggest ally when it comes to retirement savings, so get cracking. Start estimating your retirement needs:
- Social Security’s Retirement Estimator (www.ssa.gov/estimator), which automatically enters your earnings information from its records to estimate your projected Social Security benefits under different scenarios, such as age at retirement, future earnings projections, etc.
- Check whether your 401(k) plan administrator’s website has a calculator to estimate how much you will accumulate under various contribution and investment scenarios. If not, try the retirement calculators at Bankrate.com and AARP to determine your current financial status and what you’ll need to save to meet your retirement needs.
Do your research. Many helpful personal financial education and management tools are available online, including:
- The National Foundation of Credit Counseling’s MyMoneyCheckUp™ program offers a step-by-step assessment of your overall financial health and behavior in four personal finance areas: budgeting and credit management, saving and investing, planning for retirement and managing home equity (www.mymoneycheckup.org).
- Social Security’s Website for Women provides information on retirement, disability and other issues. You can also order or download their informative, free publication, “What Every Woman Should Know” (www.ssa.gov/women).
- The Women’s Savings Initiative, a program jointly developed by Heinz Family Philanthropies, the Women’s Institute for a Secure Retirement (WISER) and Visa Inc. (www.practicalmoneyskills.com/womensave). This free program features an audio- and e-book called “What Women Need to Know About Retirement,” which you can order on CD or download as a PDF or audio file from Practical Money Skills for Life, a free personal financial management program run by Visa (www.practicalmoneyskills.com/resources).
Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.
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Easing student loan repayments
January
2, 2012
By Jason Alderman
College costs are out of control. Total outstanding student loans hover around $1 trillion, second only to home mortgages. Student loan repayment takes a hefty toll on starting salaries even during good economic times. But with so many recent graduates unable to find a decent job – or any job – repayment can be a nightmare.
You can’t walk away from student loan debt. It’s practically impossible to get it discharged through bankruptcy and there’s no statute of limitations on how long lenders can pursue you through collections. Indeed, the government can withhold tax refunds and garnish wages indefinitely.
The Obama administration recently accelerated improvements to a readily available, yet underused, student loan repayment plan called Income-Based Repayment (IBR) that had been slated to begin in 2014.
IBR is available for many federally guaranteed student loans and can be particularly beneficial for low-income families, the unemployed and people with lower-paying, “public service” jobs in education, government or non-profit organizations.
Under IBR, monthly payments are capped at an affordable level relative to your adjusted gross income, family size and state of residence. For example, if you earn less than 150 percent of the government’s poverty level for your family size, you would pay zero. You still owe the money, but are not required to begin making payments until your income increases. As your income increases, so will your monthly payment – but up to no more than 15 percent of income that exceeds that same 150 percent of poverty level.
In addition, the government will forgive debt still owed after 25 years of consistent repayment. And those with qualifying public service jobs must only repay for 10 years before the balance is discharged.
Under the recent IBR enhancements, for students who took out their first loan during or after 2008 and open at least one additional loan during or after 2012, the cap will drop from 15 to 10 percent and the forgiveness period drop to 20 years. Those with older loans can still benefit from the original IBR terms.
Other IBR features include:
- All Stafford, PLUS and Consolidation Loans made under either the Direct Loan program or the Federal Family Education Loan (FFEL) program qualify for IBR, except loans in default, Parent PLUS Loans or Consolidation Loans containing Parent PLUS Loans.
- You must submit updated income documentation each year. If your income rises, so will your payment amount, although never above what you’d otherwise pay under a standard 10-year repayment schedule.
- Because IBR will likely extend the term of your loan, you’ll probably accrue more interest than under a standard 10-year payoff.
- Private student loans don’t qualify for IBR.
Borrowers with two different types of federal loans – at least one each issued under the Direct Loan and FFEL programs – may consolidate their loans under a new Special Direct Consolidations Loans program between January 1, 2012, and June 30, 2012. This will lower FFEL loan rates by 0.25 percent, plus an additional 0.25 percent discount if you sign up for automatic payments. Visit www.studentaid.ed.gov/specialconsolidation for details.
If you expect your financial hardship to be temporary, other loan repayment options, including economic hardship deferment, forbearance and extended repayment, may be better options. For details, visit the Federal Student Aid site, www.studentaid.ed.gov and search “Postponing Repayment.” Other good resources include www.finaid.org and the Project on Student Debt (www.projectonstudentdebt.org).
Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.
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