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Business Owners

Small Business

How can I ensure that my small business will survive the transition into the next generation?

Less than one-third of family businesses survive the transition from first to second generation ownership. Of those that do, about half do not survive the transition from second to third generation ownership. At any given time, 40 percent of U.S. businesses are facing the transfer of ownership issue. Founders are trying to decide what to do with their businesses; however, the options are few.

The following is a list of options to consider:

Close the doors.
Sell to an outsider or employee.
Retain ownership but hire outside management.
Retain family ownership and management control.
There are four basic reasons why family firms fail to transfer the business successfully:
Lack of viability of the business.
Lack of planning.
Little desire on the owner's part to transfer the firm.
Reluctance of offspring to join the firm.
The primary cause for failure is the lack of planning. With the right succession plans in place, the business, in most cases, will remain healthy.

What's involved in succession planning for family businesses?

Transferring the family business requires the family to make a determined effort to do the following:

Create a business strategic plan.
Create a family strategic plan.
Prepare an Estate Plan.
Prepare a Succession Plan, including arranging for successor training and setting a retirement date.

These are the four plans that make up the transition process. By implementing them, you will virtually ensure the successful transfer of your business within the family hierarchy.

Q: What is a business strategic plan?

A: A business strategic plan defines goals, objectives, and targets for a company and outlines its resources will be allocated in order to achieve them. When a strategic business plan is in place, it allows each generation an opportunity to chart a course for the firm. Setting business goals as a family will ensure that everyone has a clear picture of the company's future. A strategic plan is long-term in nature and focuses on where you want the business to be at some future date.

Q: What is a family strategic plan?

A: The family strategic plan establishes policies for the family's role in the business and is needed to maintain a healthy, viable business. For example, it should include the creed or mission statement that spells out your family's values and basic policies for the business, and it may include an entry and exit policy that outlines the criteria for working in the business. The plan should consider which family members desire to have a part in management of the business versus those who desire a more passive role.

Q: What is an estate plan?

A: An estate plan is a written document that outlines the disposal of one's estate and includes such things as a will, trust, power of attorney, and a living will. An estate plan is critical for the family and the business because, without it, you will pay higher estate taxes than necessary, allocating less of the estate to your heirs. The estate plan should be used in conjunction with the succession plan to see that the family business is transferred in a tax effective manner.

Q: What is a succession plan?

A: A succession plan identifies key individuals who will be groomed to take over the business when the time comes. It also outlines how succession will occur and how to know when the successor is ready. Having a succession plan in place goes a long way toward easing the founding or current generation's concerns about transferring the firm.

How do I know whether I have what it takes to run my own business?

Before starting out, list your reasons for wanting to go into business. Some of the most common reasons for starting a business include wanting to be self-employed, wanting financial and creative independence, and wanting to maximize your skills and knowledge.

When determining what business is "right for you," consider what you like to do with your time, what technical skills you have, recommendations from others, and whether any of your hobbies or interests are marketable. You must also decide what kind of time commitment you're willing to make to running a business.

Then you should do research to identify the niche your business will fill. Your research should address such questions as what services or products you plan to sell, whether your idea fits a genuine need, what competition exists, and how you can gain a competitive advantage. Most importantly, can you create a demand for your business?

What should I include in a business plan?

The following outline of a typical business plan can serve as a guide that you can adapt to your specific business:

Introduction
Marketing
Financial Management
Operations
Concluding Statement
Q: What should be included in the introduction to my business plan?
A: The introductory section of your business plan should give a detailed description of the business and its goals, discuss its ownership and legal structure, list the skills and experience you bring to the business, and identify the competitive advantage your business possesses.
Q: What should be included in the marketing section of my business plan?
A: In the marketing section, you should discuss what products/services your business offers and the customer demand for them. Furthermore, this section should identify your market and discuss its size and locations. Finally, you should explain various advertising, marketing, and pricing strategies you plan to utilize.
Q: What should be included in the financial management section of my business plan?
A: In this section, explain the source and amount of initial equity capital. Also, develop a monthly operating budget for the first year as well as an expected return on investment, or ROI, and monthly cash flow for the first year. Next, provide projected income statements and balance sheets for a two-year period, and discuss your break-even point. Explain your personal balance sheet and method of compensation. Discuss who will maintain your accounting records and how they will be kept. Finally, provide "what if" statements that address alternative approaches to any problem that may develop.
Q: What should be included in the operations section of my business plan?
A: This section explains how the business will be managed on a day-to-day basis. It should cover hiring and personnel procedures, insurance, lease or rent agreements. It should also account for the equipment necessary to produce your products or services and for production and delivery of products and services.
Q: What should be included in the concluding statement of my business plan?
A: In the ending summary statement, summarize your business goals and objectives and express your commitment to the success of your business. Also, be specific as to how you plan to achieve your goals.

Is a home-based business right for me?

To succeed, your business must be based on something greater than a desire to be your own boss: an honest assessment of your own personality, an understanding of what's involved, and a lot of hard work.

You have to be willing to plan ahead and then make improvements and adjustments along the road. Overall, it is important that you establish a professional environment in your home; you should even set up a separate office in your home, if possible.

What legal requirements might affect a home-based business?

A home-based business is subject to many of the same laws and regulations affecting other businesses. Be sure to consult an attorney and your state department of labor to find out which laws and regulations will affect your business. For instance, be aware of your city's zoning regulations. Also, certain products may not be produced in the home.

Most states outlaw home production of fireworks, drugs, poisons, explosives, sanitary or medical products, and toys. Some states also prohibit home-based businesses from making food, drink, or clothing.

In terms of registration and accounting requirements, you may need a work certificate or a license from the state, a sales tax number, a separate business telephone, and a separate business bank account.

Finally, if your business has employees, you are responsible for withholding income and social security taxes, and for complying with minimum wage and employee health and safety laws.

How can I avoid running into cash flow problems in my small business?

Failure to properly plan cash flow is one of the leading causes of small business failures. Experience has shown that many small business owners lack an understanding of basic accounting principles. Knowing the basics will help you better manage your cash flow.

A business's monetary supply can exist either as cash on hand or in a business checking account available to meet expenses. A sufficient cash flow covers your business by meeting obligations (i.e., paying bills), serving as a cushion in case of emergencies, and providing investment capital.

The Operating Cycle

The operating cycle is the system through which cash flows, from the purchase of inventory through the collection of accounts receivable. It measures the flow of assets into cash. For example, your operating cycle may begin with both cash and inventory on hand. Typically, additional inventory is purchased on account to guarantee that you will not deplete your stock as sales are made.

Your sales will consist of cash sales and accounts receivable - credit sales. Accounts receivable are usually paid 30 days after the original purchase date. This applies to both the inventory you purchase and the products you sell. When you make payment for inventory, both cash and accounts payable are reduced. Thirty days after the sale of your inventory, receivables are usually collected, which increases your cash. Now your cash has completed its flow through the operating cycle and is ready to begin again

Cash-flow analysis should show whether your daily operations generate enough cash to meet your obligations, and how major outflows of cash to pay your obligations relate to major inflows of cash from sales. As a result, you can tell if inflows and outflows from your operation combine to result in a positive cash flow or in a net drain. Any significant changes over time will also appear.

A monthly cash-flow projection helps to identify and eliminate deficiencies or surpluses in cash and to compare actual figures to past months. When cash-flow deficiencies are found, business financial plans must be altered to provide more cash. When excess cash is revealed, it might indicate excessive borrowing or idle money that could be invested. The objective is to develop a plan that will provide a well-balanced cash flow.

What steps can I take to improve my business cash flow?

To achieve a positive cash flow, you must have a sound plan. Your business can increase cash reserves in a number of ways:

Collecting receivables: Actively manage accounts receivable and quickly collect overdue accounts. Revenues are lost when a firm's collection policies are not aggressive.

Tightening credit requirements: As credit and terms become more stringent, more customers must pay cash for their purchases, thereby increasing the cash on hand and reducing the bad-debt expense. While tightening credit is helpful in the short run, it may not be advantageous in the long run. Looser credit allows more customers the opportunity to purchase your products or services.

Manipulating price of products: Many small businesses fail to make a profit because they erroneously price their products or services. Before setting your prices, you must understand your product's market, distribution costs, and competition. Monitor all factors that affect pricing on a regular basis and adjust as necessary.

Taking out short-term loans: Loans from various financial institutions are often necessary for covering short-term cash-flow problems. Revolving credit lines and equity loans are common types of credit used in this situation.

Increasing your sales: Increased sales would appear to increase cash flow. However, if large portions of your sales are made on credit, when sales increase, your accounts receivable increase, not your cash. Meanwhile, inventory is depleted and must be replaced. Because receivables usually will not be collected until 30 days after sales, a substantial increase in sales can quickly deplete your firm's cash reserves.

Should I keep a cash reserve in my small business?

Choosing a Professional

When should I hire a lawyer?

For certain legally complex or time-consuming disputes or problems, there is no doubt that a lawyer is necessary. For example, if you want a will prepared, or a more complex business deal handled, you will need to hire a lawyer. And, if a court case is involved (other than a simple, routine matter), you'll almost always need a lawyer.

When deciding whether to hire an attorney, consider the following:

Does the matter involve a complex legal issue or is it likely to go to court? Is a large amount of money, property, or time involved? These factors indicate that you need to hire a lawyer.
Is there a form or self-help book available that you can use instead of hiring a lawyer? You may be able to solve certain problems with only minimal assistance.
Are there any non-lawyer legal resources available to assist you?

Unlike more complex transactions, some transactions can be handled without a lawyer. For instance, a living will can often be prepared with the help of organizations such as the American Association of Retired Persons (AARP). Non-profits that deal with retired and elderly persons may also be able to provide you with the necessary paperwork to create a living will in your state, as well as additional information and/or assistance in completing the form properly.

How would I handle a dispute on my own?

Many disputes can be resolved by writing letters or negotiating with the other party on your own, or by using arbitration or mediation. Legal self-help manuals and seminars can provide you with the tools to handle a portion of, or the entire, dispute.

Tip: Consider hiring an attorney to review papers or provide advice, rather than fully representing you.

Negotiating on your own. Negotiating on your own behalf is often the best way to solve minor disputes. Visit your local library or search online for resources that explain the best way to negotiate a dispute.

Tip: Before starting the negotiation process, it's usually a good idea to familiarize yourself with legal issues that might come up by calling a legal hot-line or consulting other sources of information.

Mediation or arbitration. Dispute resolution centers have been established in every state. Most specialize in helping to resolve problems in the areas of consumer complaints, landlord/tenant disputes, and disagreements between neighbors or family members.

During the mediation process, a neutral person assists the two sides in discussing their differences and helps them possibly reach an agreement. In an arbitration setting, the neutral third party conducts a more formal process and makes a decision (usually written) after listening to both sides.

If both parties agree to it, using a dispute resolution center or a private mediation center is a lower-cost alternative to bringing a lawsuit to court or hiring an attorney to represent you during a negotiation process.

Small claims court. Small claims court may be appropriate if you have a monetary claim for damages within the limits set by your state (usually $1,000 to $5,000). These courts are more informal and involve less paperwork than regular courts. If you file in small claims court, be prepared to act as your own attorney, gathering necessary evidence, researching the law, and presenting your story in court.

How do I find a good lawyer?

The first step is to compile a list of names. Ask relatives, friends, clergy, social workers, or your doctor for recommendations. State bar associations usually have lawyer referral lists organized by specialty. Martindale-Hubbell also has a comprehensive lawyer referral service. For specific groups such as persons with disabilities, older persons, or victims of domestic violence consult a community lawyer referral services. The court and your banker may also be good referral sources. Finally, don't forget the yellow pages of the telephone book, which often lists lawyers according to their specialties.

Tip: If you use a referral service, ask how attorneys are chosen to be listed with that particular service. Many services make referrals to all lawyers who are members (regardless of type and level of experience) of a particular organization.

Tip: Be aware that many bar associations have committees that conduct training or public service work in various areas of specialty. An attorney serving on one of these committees could have the expertise you are looking for.

After developing a list of potential lawyers, interview them initially by telephone to narrow down the list and then arrange face-to-face interviews.

What questions should I ask?

Before committing yourself to a consultation, ask potential candidates the following questions:

Do you provide a free consultation for the initial interview?
How long have you been in practice?
What percentage of your cases is similar to my type of legal problem? (A lawyer with experience in handling cases like yours will be more efficient).
Can you provide me with any references, such as trust officers in banks, other attorneys, or clients?
Do you represent any clients or special-interest groups that might cause a conflict of interest?
What type of fee arrangement do you require? Are the fees negotiable?
What information should I bring with me to the initial consultation?

Follow up your phone calls by scheduling interviews with at least two of the attorneys. Don't feel embarrassed about selecting only the best candidates or canceling appointments with some of the attorneys after you complete your initial phone calls.

Next, interview the candidates. Come prepared with a brief summary of your immediate case (including dates and facts) as well as a list of general questions for the attorney. The purpose of the interview is twofold: (1) to decide if the attorney has the necessary experience and is available to take your case; and, (2) to decide if you are comfortable with the fee arrangement and, most importantly, comfortable working with the attorney.

What legal fee arrangements are best for me?

The market rate for any given legal service varies by locality. A "fair" fee is what seems fair to you, based on your knowledge of going rates. Whether you are comfortable with a fee is likely to be based on the following factors:

How much you can afford
Whether the case is routine or requires special expertise
The range of attorney rates for this type of case in your area
How much work can you can do on the case yourself
The most common types of fee arrangements used by lawyers are listed below.
Flat fee. The lawyer will charge you a specific total fee for your case. A flat fee is usually offered only if your case is relatively simple or routine.
Note: While lawyers will not set a flat fee for litigation, they can usually give you a good estimate of the costs at each stage.
Tip: Ask if photocopying, typing, and other out-of-pocket expenses are covered by this flat fee.
Hourly rate. Attorneys charge by the hour (or portion of an hour). For instance, if your attorney's fee is $100 per hour, and he or she works ten hours, the cost will be $1,000. Some attorneys charge a higher rate for court work and less per hour for research or case preparation. And, as a rule, large law firms usually charge more than small law firms and attorneys in urban areas often charge more per hour than attorneys practicing in rural areas.
Tip: If you agree to an hourly rate, be sure to find out how much experience your attorney has had with your type of case. A less experienced attorney will usually require more time to research your case, although he or she may charge a lower hourly rate.

Tip: Ask what is included in the hourly rate. If other staff such as secretaries, messengers, paralegals, and law clerks will be working on your case, find out how their time will be charged to you? Ask about costs and out-of-pocket expenses, which are usually billed in addition to the hourly rate.

Contingency fee. Under this arrangement, the attorney's fee is based on a percentage of what you are awarded in the case. If you lose the case, the attorney does not get a fee, although you will still have to pay expenses. A one-third fee is common.

Tip: Ask whether the lawyer will calculate the fee before or after the expenses. This can make a substantial difference, since calculating the percentage of the attorney's fee after the expenses have been deducted increases the amount of money you receive.

How can I save money on legal fees?

It is important to remember that a lawyer's fees are often negotiable, but your lawyer is unlikely to invite you to bargain over fees! Here are some tips for saving ensuring the cost-effectiveness of legal fees.

Comparison shop for flat fees on simple cases.

Ask about the billing method for hourly rates. A written agreement specifying the fee arrangement and the work involved is the best way to be clear about the total cost of the case.

Choose a lawyer with the appropriate qualifications. Most legal work is relatively routine in nature and often has more to do with knowing which form to fill out and which county clerk will process it most quickly.

Offer to perform some of the work.

Hire the attorney to act as a go-between. Some lawyers are open to negotiating a lower fee if you are only looking for their legal expertise to write a letter to the other side to settle.

Hire the attorney to act as your pro se coach. If you want to represent yourself in court (called "appearing pro se"), hire your attorney to act as a pro se coach who will review documents and letters that you prepare and sign.

Choose a lawyer who specializes in what you need.

Prepare for meetings with your attorney.

The more work you do to prepare, the less time your attorney needs to spend (and charge you) for finding the information.

Answer your attorney's questions fully. If your attorney knows all the facts as early as possible in the case, it will save time and money that might be spent later on further investigations or misdirected case development.

If the situation changes, tell your attorney as soon as possible. You don't want your attorney heading in the wrong direction on a case.

Maximize contact with your attorney. Consolidate your questions or information-giving into a single call. Unless you have a specific reason for doing so, pass on information in writing or to other office staff rather than speaking directly with the attorney.

Examine your bill. Request that your attorney bill you on a regular basis. Even if you have agreed on a contingency fee and will not actually pay the expenses until the case is settled, you should periodically examine the expenses. Question any items that you do not understand or that are not covered in your fee agreement.

Employee Benefits

As a Small Employer What Do I Need to Know about Employee Benefits?

The employer must pay in whole or in part for certain legally mandated benefits and insurance coverage, including Social Security, unemployment insurance, and workers' compensation. Funding for the Social Security program comes from mandatory contributions from employers, employees and self-employed persons into an insurance fund that provides income during retirement years.

Full retirement benefits normally become available at age 66 for people born after 1943, and age 67 for those born in 1960 or later. Other aspects of Social Security deal with survivor, dependent and disability benefits, Medicare, Supplemental Security Income (SSI) and Medicaid. Unemployment insurance benefits are payable under the laws of individual states from the Federal-State Unemployment Compensation Program.

Workers' compensation provides benefits to workers disabled by occupational illness or injury. Each state mandates coverage and provides benefits. In most states, private insurance or an employer self-insurance arrangement provides the coverage. Some states mandate short-term disability benefits as well.

A comprehensive benefit plan might include the following elements health insurance, disability insurance, life insurance, a retirement plan, flexible compensation, and sick, personal, and vacation leave. A benefit plan might also include bonuses, service awards, reimbursement of employee educational expenses and perquisites appropriate to employee responsibility.

As an employer, before you implement any benefit plan, it's important to decide what you're willing to pay for this coverage. You may also want to seek employee input on what benefits interest them. For instance, is a good medical plan more important than a retirement plan? Furthermore, you must decide whether it is more important to protect your employees from economic hardship now or in the future. Finally, you must decide if you want to administer the plan or have the insurance carrier do it.

What Types of Medical Plans are Available for Employees?

Today, most health insurance falls under what is called "managed care" in which you pay monthly premiums, as well as co-pays and deductibles. The four main types of health insurance are briefly described below. For more information contact your plan administrator.

In addition, due to the passage of the Affordable Care Act of 2010, which was upheld by the Supreme Court in July 2012, starting in 2014 states may opt to create a "healthcare exchange" that enable individuals and small businesses to compare health plans, get answers to questions, find out if they are eligible for tax credits for private insurance or health programs like the Children's Health Insurance Program (CHIP), and enroll in a health plan that meets their needs.

Health maintenance organizations (HMOs) provide health care for their members through a network of hospitals and physicians. Comprehensive benefits typically include preventive care, such as physical examinations, well baby care and immunizations, and stop-smoking and weight control programs. The choice of primary care providers is limited to one physician within a network; however, there is frequently a wide choice for the primary care physician.

A preferred provider organization (PPO) is a network of physicians and/or hospitals that contracts with a health insurer or employer to provide health care to employees at predetermined discounted rates. PPOs offer a broad choice of health care providers.

Point of Service (POS) health care plans are similar to HMOs in that you choose a primary-care doctor from the plan's network, but you must have a referral in order to see in-network specialists. You can also see out of network providers as long as you get a referral first.

Another option to consider is a high-deductible health insurance combined with a health-savings account (HSA) or a health reimbursement arrangement (HRA). By law, the two must be linked.

NOTE: HSAs should not be confused with FSAs (Flexible Spending Accounts). Money that you set aside in a health savings account or a health reimbursement arrangement to pay for certain medical expenses is tax-free. HSAs must be linked to a high-deductible health insurance plan, and HRAs often are. (For preventive care, such as cancer screenings, you might not have to pay the deductible first.) Typically, a special debit type card is used for the HSA or HRA account to keep track of expenses and payments.

What Types of Disability Benefits do Companies Provide to Employees?

A disability plan provides income replacement for the employee who cannot work due to illness or accident. These plans are either short term or long term and are distinct from workers' compensation because they pay benefits for non-work-related illness or injury.

Short-term disability (STD) is usually defined as an employee's inability to perform the duties of his or her normal occupation. Benefits may begin on the first or the eighth day of disability and are usually paid for a maximum of 26 weeks. The employee's salary determines the benefit level, ranging from 60 to 80 percent of pay.

Long-term disability (LTD) benefits usually begin after short-term benefits conclude. LTD benefits continue for the length of the disability or until normal retirement. Again, benefit levels are a percentage of the employee's pay, usually between 60 and 80 percent. Social Security disability frequently offsets employer-provided LTD benefits. Thus, if an employee qualifies for Social Security disability benefits, these are deducted from benefits paid by the employer.

What Types of Life Insurance Plans are Available for Employees?

Traditionally, life insurance pays death benefits to beneficiaries of employees who die during their working years. Most employers purchase a group life policy for their employees. Typically an employee is provided with life insurance coverage that is at least equal to their yearly salary. For example, an employee who makes $50,000 per year would receive $50,000 of coverage. The employer is responsible for the premium but may require employees to pay part of the premium cost.

What is Self-Insurance?

With self-insurance, the business predetermines and then pays a portion or all of the medical expenses of employees in a manner similar to that of traditional healthcare providers. Funding comes through the establishment of a trust or a simple reserve account and a self-insured employer assumes the risk for paying the health care claim costs for its employees.

As with other health care plans, the employee generally pays a portion of the cost of premiums. Catastrophic coverage is usually provided through a "stop-loss" policy, a type of coinsurance purchased by the company. The plan may be administered directly by the company or through an administrative services contract. Businesses with self-insured health plans are not subject to taxes, benefit requirements, profit limits, or other provisions of the Affordable Care Act.

What is a "Cafeteria Plan?"

The idea behind cafeteria plans is that amounts which would otherwise be taken as taxable salary are applied, usually tax-free, for needed services like health or child care. Besides saving employee income and social security taxes, salary diverted to cafeteria plan benefits isn't subject to social security tax on the employer. With a cafeteria plan, employees can choose from several levels of supplemental coverage or different benefit packages. These can be selected to help employees achieve personal goals or meet differing needs, such as health coverage (family, dental, vision), retirement income (401(k) plans) or specialized services (dependent care, adoption assistance, legal services - legal services amounts are taxable).

Recordkeeping

What kind of records do I need to keep in my business?

Complete and accurate financial record keeping is crucial to your business success. Good records provide the financial data that helps you operate more efficiently. Accurate and complete records enable you to identify all your business assets, liabilities, income, and expenses. That information helps you pinpoint both the strong and weak phases of your business operations.

Moreover, good records are essential for the preparation of current financial statements, such as the income statement (profit and loss) and cash-flow projection. These statements, in turn, are critical for maintaining good relations with your banker. Finally, good records help you avoid underpaying or overpaying your taxes. In addition, good records are essential during an Internal Revenue Service audit, if you hope to answer questions accurately and to the satisfaction of the IRS.

To assure your success, your financial records should show how much income you are generating now and project how much income you can expect to generate in the future. They should inform you of the amount of cash tied up in accounts receivable. Records also need to indicate what you owe for merchandise, rent, utilities, and equipment, as well as such expenses as payroll, payroll taxes, advertising, equipment and facilities maintenance, and benefit plans for yourself and employees. Records will tell you how much cash is on hand and how much is tied up in inventory. They should reveal which of your product lines, departments, or services are making a profit, as well as your gross and net profit.

The Basic Recordkeeping System

A basic record-keeping system needs a basic journal to record transactions, accounts receivable records, accounts payable records, payroll records, petty cash records, and inventory records.

An accountant can develop the entire system most suitable for your business needs and train you in maintaining these records on a regular basis. These records will form the basis of your financial statements and tax returns.

What do I need to know about automating part or all of my business?

You must have a clear understanding of your firm's long- and short-range goals, the advantages and disadvantages of all of the alternatives to a computer and, specifically, what you want to accomplish with a computer. Compare the best manual (non-computerized) system you can develop with the computer system you hope to get. It may be possible to improve your existing manual system enough to accomplish your goals. In any event, one cannot automate a business without first creating and improving manual systems.

Business Applications Performed by Computers

A computer's multiple capabilities can solve many business problems from keeping transaction records and preparing statements and reports to maintaining customer and lead lists, creating brochures, and paying your staff. A complete computer system can organize and store many similarly structured pieces of information, perform complicated mathematical computations quickly and accurately, print information quickly and accurately, facilitate communications among individuals, departments, and branches, and link the office to many sources of data available through larger networks. Computers can also streamline such manual business operations as accounts receivable, advertising, inventory, payroll, and planning. With all of these operations, the computer increases efficiency, reduces errors, and cuts costs.

Computer Business Applications

Computers also can perform more complicated operations, such as financial modeling programs that prepare and analyze financial statements and spreadsheet and accounting programs that compile statistics, plot trends and markets and do market analysis, modeling, graphs, and forms. Various word processing programs produce typewritten documents and provide text-editing functions while desktop publishing programs enable you to create good quality print materials on your computer. Critical path analysis programs divide large projects into smaller, more easily managed segments or steps.

How can I ensure that I'm choosing the right computer system?

To computerize your business you need to choose the best programs for your business, select the right equipment, and then implement the various applications associated with the software. In addition, application software is composed of programs that make the computer perform particular functions, such as payroll check writing, accounts receivable, posting or inventory reporting and are normally purchased separately from the computer hardware. QuickBooks is a good example of this type of software.

To determine your requirements, prepare a list of all functions in your business. in which speed and accuracy are needed for handling volumes of information. These are called applications.

For each of these applications make a list of all reports that are currently produced. You should also include any pre-printed forms such as checks, billing statements or vouchers. If such forms don't exist, develop a good idea of what you want - a hand-drawn version will help. For each report list the frequency with which it is to be generated, who will generate it and the number of copies needed. In addition to printed matter, make a list of information that you want to display on the computer video screen (CRT).

For all files you are keeping manually or expect to computerize list, identify how you retrieve a particular entry. Do you use account numbers or are they organized alphabetically by name? What other methods would you like to use to retrieve a particular entry? Zip code? Product purchased? Indeed, the more detailed you are, the better your chance of finding programs compatible with your business.

How can I successfully implement a new computer system?

When implementing computer applications for your business, problems are inevitable, but proper planning can help you avoid some and mitigate the effects of others. First, explain to each affected employee how the computer will change his or her position. Set target dates for key phases of the implementation, especially the last date for format changes. Be sure the location for your new computer meets the system's requirements for temperature, humidity, and electrical power. Prepare a prioritized list of applications to be converted from manual to computer systems, and then train, or have the vendors train, everyone who will be using the system.

After installation, each application on the conversion list should be entered and run parallel with the preexisting, corresponding manual system until you have verified that the new system works.

System Security

If you will have confidential information in your system, you will want safeguards to keep unauthorized users from stealing, modifying or destroying the data. You can simply lock up the equipment, or you can install user identification and password software.

Data Safety

The best and cheapest insurance against lost data is to back up information on each diskette regularly. Copies should be kept in a safe place away from the business site. Also, it is useful to have and test a disaster recovery plan and to identify all data, programs, and documents needed for essential tasks during recovery from a disaster.

Finally, be sure to employ more than one person who can operate the system, and ensure that all systems are continually monitored.

Travel and Entertainment

Can I deduct the cost of meals on days I call on customers or clients away from my office?

Generally not. Usually, you can only deduct costs of meals when you're away from home overnight. Even so, the deduction is allowed only to the extent of 50 percent of the cost of meals and related tips. Also, because business-related entertainment expenses were eliminated under tax reform, starting in 2018, the deduction for meals at entertainment events is deductible (at 50%) only when costs for meals are itemized separately from entertainment costs.For tax years 2021 and 2022, the deduction was allowed at 100 percent if purchased from a restaurant (eat-in or take-out).

Must I report employer reimbursements for travel, entertainment and meals?

Under tax reform, miscellaneous itemized deductions subject to the 2-percent floor were eliminated for tax years 2018-2025. However, prior to tax reform (i.e., for tax years prior to 2018), the following applied:It depends. If you give your employer a detailed expense accounting, return any excess reimbursement, and meet other requirements, you don't have to report the reimbursement and you don't deduct the expenses. This means that any deduction limits are imposed on your boss, not you, and the 2-percent limit on miscellaneous itemized deductions won't affect your travel, entertainment and meals costs.

What are the limits on deductible travel, entertainment and meals costs?

Prior to tax reform (i.e., for tax years before 2018), the deduction for business entertainment and business meals could not exceed 50 percent of the cost. Note that due to the coronavirus pandemic, business-related meals purchased from a restaurant (eat-in or take-out) were deductible at 100 percent for tax years 2021 and 2022. There are no dollar limits. Expenses must be "ordinary and necessary" (meaning appropriate and helpful) and not "lavish or extravagant," but this doesn't bar deluxe accommodations, travel or meals. Additionally, there were additional special limitations on skyboxes and luxury water travel.

Starting in 2018 and continuing through tax year 2025, no deduction is allowed for business entertainment. Tax reform also eliminated deductions for expenses relating to sporting events such as those for skybox expenses (previously 50%), tickets to sporting events (previously 50%), and transportation to and from sporting events (previously 50%).

Can I deduct living expenses on temporary assignment away from the area where I live and work?

Yes. Living expenses at the temporary work site are away from home travel expenses. An assignment is temporary if it's expected to last no more than a year. If it's expected to last more than a year, the new area is your tax home, so you can't deduct expenses there as away from home travel.

What expenses can I deduct while traveling away from home?

A wide range of expenses can be deducted while traveling away from home.

Here are the main ones:

Transportation fares, or actual costs (or a standard per mile rate) of using your own vehicle. Also, transportation costs of getting around in the work area-to and from hotels, restaurants, offices, terminals, etc.
Lodging and meals (subject to the 50 percent limit on meals; 100 percent in 2021 and 2022)
Phone, fax, laundry, baggage handling
Tips related to the above

What can't be deducted as travel expenses?

The following travel expenses cannot be deducted:

Costs of commuting between your residence and a work site, but it's a deductible business trip if your residence is your business headquarters.
Travel as education
Job hunting in a new field or looking for a new business site

What can I deduct for business entertainment?

Prior to 2018 and the passage of the TCJA, the following generally applied:

There should be a business discussion before, during, and after the meals and entertainment.
The deduction for entertainment and meals is limited to 50 percent of the cost. In 2021 and 2022 restaurant meals were deductible at 100 percent.

There were further limitations for club dues, entertainment facilities, and skyboxes.
Spouses of business associates and your own spouse could be included in the entertainment in settings where spouse attendance is customary.
After tax reform, and starting in 2018, the rules changed and the entertainment expense deduction was eliminated entirely with the exception of certain activities such as office holiday parties, which remain 100% deductible. For example, the deduction for business entertainment expenses is eliminated but meals remain deductible at 50 percent (100 percent in 2021 and 2022). In addition, the following now applies:
Entertainment-related Meals. Prior to tax reform expenses for meals purchased during entertainment activities such as meals included at a sporting event were deductible at 50%. Starting in 2018; however, the deduction is eliminated unless the costs of meals are invoiced separately.
Sporting Events. Tax reform eliminated all deductions relating to sporting events including deductions for sky box expenses (previously 50%), tickets to sporting events (previously 50%), tickets to qualified charitable events (previously 100%), and transportation to and from sporting events (previously 50%).

Club Memberships. While there was never a deduction for club dues, business owners were able to take a 50% deduction for expenses incurred at a business, recreational, or social club as long as it was related to their trade or business. Under tax reform, however, that deduction has been eliminated.

How do I prove my travel and entertainment expenses?

If you're an employee who is reimbursed for expenses you'll need to file an expense report for your employer, which is a written accounting of your expense while on travel. If you received a cash advance, you'll also need to return to the employer any amounts in excess of your expenses.

Some per diem arrangements and mileage allowances called "accountable plans" take the place of detailed accounting to the employer, if time, place and business purpose are established.

For tax years 2018 through 2025, miscellaneous itemized deductions (Form 1040, Schedule A) have been eliminated due to tax reform (Tax Cuts and Jobs Act of 2017). Prior to tax reform (i.e., tax years prior to 2018), the following held true:

Where expenses aren't fully reimbursed by your employer or excess reimbursements aren't returned, detailed substantiation to IRS is required and, if you're an employee, your deductions are subject to the 2-percent floor on miscellaneous itemized deductions. In addition, your expense records should be "contemporaneous," that is, recorded close to the time expenses are incurred.

Marketing and Pricing

How do I research whether my small business' product or service will sell?

Market research is the most critical element of successful business planning because it provides the basic data that will determine if and where you can successfully sell your product or service and how much to charge. It is a process that involves scrutinizing your competition and your customer base, and interviewing potential suppliers.

There are a number of benefits to conducting market research such as helping you create primary and alternative sales approaches to a given market, making profit projections from a more accurate base, organizing marketing activities, developing critical short/mid-term sales goals, and establishing the market's profit boundaries, but first, you must define your goals and organize the collection/analysis process.

What market research questions should I ask?

Your research questions should revolve around the demographic data of your customers such as age, location, and income (what they can afford). Your research should also address larger questions such as what type of demand there is for your product, how you might generate demand. In addition, you will want to find out how many competitors provide the same service or product and whether you can you effectively compete with regard to price, quality, and delivery.

You also might want to ask yourself whether you can price the product or service so as to assure a profit. Finally, it is helpful to understand the general economy of your service or product area and the areas within your market that are declining or growing.

What costs should I consider when determining how much to charge for my products or services?

Every component of a service or product has a different, specific cost. Many small firms fail to analyze each component of their commodity's total cost, therefore failing to price profitably. Once this analysis is done, prices can be set to maximize profits and eliminate any unprofitable service. Cost components include material, labor and overhead costs.

Material Costs. These are the costs of all materials found in the final product.

Labor Costs. Labor costs are the costs of the work that goes into the manufacturing of a product. The direct labor costs are derived by multiplying the cost of labor per hour by the number of person-hours needed to complete the job. Remember to use not only the hourly wage but also the dollar value of fringe benefits. These include social security, workers' compensation, unemployment compensation, insurance, retirement benefits, etc.

Overhead Costs. Overhead costs are any costs that are not readily identifiable with a particular product. These costs include indirect materials, such as supplies, heat, and light, depreciation, taxes, rent, advertising, transportation, and insurance.

Overhead costs also cover indirect labor costs, such as clerical, legal and janitorial services. Be sure to include shipping, handling, and/or storage as well as other cost components.

Part of the overhead costs must be allocated to each service performed or product produced. The overhead rate can be expressed as a percentage or an hourly rate. It is important to adjust your overhead costs annually. Charges must be revised to reflect inflation and higher benefit rates. It's best to project the costs semiannually, including increased executive salaries and other projected costs.

Business Forms of Organization

Which kinds of business organization or business entity will limit my liability to business creditors?

Corporations, limited liability companies (LLCs), limited partnerships, and limited liability partnerships (LLPs) are the three most common business entities that limit liability. General partnerships and sole proprietorships don't limit owners' liability. Limited partnerships limit the liability of some partners (limited partners) and not others (general partners).

What is the "corporate double tax" and how can it be avoided?

Double taxation of corporations results in a significant tax burden on corporate income. Often referred to as the "corporate double tax," it occurs when a business corporation (or an entity treated for tax purposes as a business corporation) pays a federal tax on its income, and tax is also paid by its owners in the form of individual income tax on capital gains and dividends when they collect corporate profits.

Double taxation occurs even if the corporation retains its after-tax earnings (as opposed to distributing them as dividends) because the value of the stock increases to reflect an increase in assets held by the corporation. Shareholders that decide to sell their stock will realize a capital gain and pay tax on that gain.

The tax on the corporation is called an "entity level tax" and an entity so taxed is called a "C-corporation" (C-corp). The double tax can be avoided one of two ways:

By electing to be an S-corp. While this doesn't change its nature under state business law, but in most cases eliminates federal tax at the corporate level.
By postponing profits distributions to corporate owners, the second tax (on the owners) can be postponed.

Which types of business entity are best for tax purposes?

It depends. Generally speaking, the "pass-through" type of entity saves tax overall by eliminating tax at the entity level. pass-through entity owners are taxed directly on their share of entity profits. Another pass-through advantage is that owners can take tax deductions for startup or operating losses, against their income from investments or other businesses.

Which are the "pass-through" entities?

You have much control over whether the entity you choose is treated as a pass-through entity for federal tax purposes (see below), but the leading pass-through forms are general partnerships, limited partnerships, LLPs, LLCs, S-corps, and sole proprietorships.

If your business is in the form of a partnership (any type) or limited liability company, you may choose whether your business is treated for tax purposes as a corporation or a partnership (or, if you're the only one in the LLC, as a corporation or disregarded for tax purposes). Tax and business advisors call this choice the "check-the-box" system. If it's actually incorporated, or you choose to have it treated as a corporation, you may qualify to have it treated as a pass-through by electing S-corp status.

Your choice under check-the-box is binding. That is, if you choose one entity (say, corporation) in one year and another (say, partnership) the next year, you must pay tax as if you sold last year's entity and put the proceeds into this year's.

What entities will let me both limit my liability and avoid the double tax?

S-corps (usually) and all of the following, assuming that you don't choose to have them treated as corporations: LLCs; LLPs; and limited partnerships, for the limited partners. For sole owners, the choice is limited to S-corps or, in states that allow single-owners, LLCs.

What's so great about limited liability companies (LLCs)?

LLCs combine limited liability with pass-through tax treatment. They can offer benefits unavailable from S-corps, their nearest rival (for businesses other than professional practices). The key benefits:

A way to allocate certain tax benefits disproportionately among owners.
Opportunity for greater loss deductions.
Avoiding or reducing tax when a new owner joins the business or when distributions are made to owners in business liquidation.

State law varies when it comes to allowing single-owner LLCs; some states allow it and some states don't. Where it is allowed, the owner can choose under check-the-box rules to have the LLC disregarded for tax purposes (without losing LLC limited liability), and pay tax directly on LLC income.

In states where single member LLCs aren't allowed S-corps are a good alternative, and they can also postpone tax, as compared to LLCs, where the business is to be bought out by a corporate giant.

What special considerations are there if my business is a professional practice?

Limitation of liability, especially malpractice liability, is a major concern. No entity will protect you against liability for your own malpractice. But LLCs, Professional Limited Liability Companies (PLLCs), and LLPs, where available for professional practices, will protect you against liability for malpractice of co-owner professionals in the firm, and maybe (depending on state law) for other debts. Professional Corporations (PCs) may not protect against liability for a co-owner's malpractice, depending on state law.

The tax rules governing those in LLCs, PLLCs, and LLPs are about the same, and somewhat more liberal than those for PCs.

What are the federal tax consequences of changing your form of business organization?

This is a critical decision that should be studied carefully with professional guidance, but briefly stated:

There's no tax on a change from C-corp to S-corp or vice versa.

There is no tax on a change from LLC, partnership or sole proprietorship to a C or S-corp.
There is no tax on a change from a proprietorship or partnership to LLC or vice versa.
There is a tax on a change from C or S-corp to an LLC, partnership or sole proprietorship.

Do state business entity rules follow federal tax rules?

Keep in mind the difference between state business law and state tax law. The tax status you choose for your entity under the federal check-the-box system doesn't make it that entity for state business law purposes. So, for example, choosing corporate tax treatment for a partnership won't bring corporate limited liability.

There is a trend for states to treat the entity chosen under federal check-the-box as the entity recognized for state tax purposes, but this is optional with the state.

State law may accept pass-through status for an entity (such as an S-corp or an LLC) and still impose a tax of some kind on the entity.

Incorporating

What is a corporation?

A corporation is a legal entity that exists separately from its owners. Creation of a corporation occurs when properly completed articles of incorporation are filed with the correct state authority, and all fees are paid.

What is the difference between an "S" corporation and a "C" corporation?

All corporations start as "C" corporations and are required to pay income tax on taxable income generated by the corporation. A C-corporation becomes an S-corporation by completing and filing federal form 2553 with the IRS. An S-corporation's net income or loss is "passed-through" to the shareholders and are included in their personal tax returns. Because income is NOT taxed at the corporate level, there is no double taxation as with C-corporations. Subchapter S-corporations, as they are also called, are restricted to having no more than 100 shareholders.

Do I need an attorney to incorporate?

An attorney is not a legal requirement for incorporating a business in any state except South Carolina, where a signature by a South Carolina attorney licensed to practice in the state is required on articles of incorporation. In every other state, you can prepare and file the articles of incorporation yourself. However, if you are unsure of what steps your business should take and you don't have the time to research the matter yourself, a consultation with a good corporate attorney is often well worth the money you spend.

How do I know if my name is available?

We will request your two top name choices. We will check these as part of your order. If neither of these is available, we will contact you for other name choices.

How do I name my corporation?

First, we recommend that you spend some time coming up with a name for your corporation. Although each state has different rules concerning the naming of your corporation, the most common rule is that it must not be deceptively similar to another already formed company. The corporate name must include a suffix. Some examples are "Incorporated", "Inc.", "Company", and "Corp." However, your state may have different suffix requirements.

What are the benefits of incorporating?

The primary advantage of incorporating is to limit your liability to the assets of the corporation only. Usually, shareholders are not liable for the debts or obligations of the corporation. So if your corporation defaults on a loan, unless you haven't personally signed for it, your personal assets won't be in jeopardy. This is not the case with a sole proprietorship or partnership. Corporations also offer many tax advantages that are not available to sole proprietors.

Some other advantages include:

A corporation's life is unlimited and is not dependent upon its members. If an owner dies or wishes to sell their interest, the corporation will continue to exist and do business.
Retirement funds and qualified retirement plans (like 401k) may be set up more easily with a corporation.
Ownership of a corporation is easily transferable.
Capital can be raised more easily through the sale of stock.
A corporation possesses centralized management.

What is a Registered Agent?

Most every state requires that a corporation has a registered agent. That agent must have a physical location in the formation state. The registered agent can typically be any person (usually a resident of the state) or any properly registered company who is available during normal business hours to receive official state documents or service of process (lawsuit).

How many Directors/Shareholders do I need?

Most states allow for one person to act as shareholder, director, and all officer roles.

How many shares of stock should I choose, and at what par value?

We provide a default of 200 shares, although you can choose any amount you want on all orders. Your par value is not requested on all orders, and is usually expressed as "No Par Value" or some dollar amount per share such as "$1.00" or "$0.10." Some states require that you do not issue your stock for less than the par value. Some states also base their fees on the number of shares authorized, multiplied by the par value.

What is a Federal Tax Identification Number or EIN?

Your corporation is required to have an Employer Identification Number (EIN) also known as your Federal Tax Identification Number so that the IRS can track payroll and income taxes paid by the corporation. But, like a social security number, an EIN is used for most everything the business does. Your bank will require an EIN to open your corporate bank account.

We provide two EIN services:

Basic EIN Service - We prepare and email your SS4 (EIN application) & easy one-page instructions for obtaining your EIN. You need only review, sign and fax or call in the information to the IRS to get your EIN.
Full EIN Service - We actually obtain your company's EIN for you.

What do I need to do AFTER I incorporate?

You must have your initial shareholder(s) meeting to elect your director(s), if your director(s) haven't been designated in the articles. Then, you must have your initial organizational meeting of your directors. At this meeting, you will need to elect your officers, adopt your company's bylaws, and issue your stock (among other actions).

How do I get started?

Once you have decided on a name, order your corporation online. Once we receive your paid order, we verify the availability of your name choices, draft your articles, file them with the state and send you all appropriate documents after they have been filed.

Limited Liability Companies

Who should form an LLC?

You should consider forming an LLC (limited liability company) if you are concerned about personal exposure to lawsuits arising from your business. For example, if you decide to open a store-front business that deals directly with the public, you may worry that your commercial liability insurance won't fully protect your personal assets from potential slip-and-fall lawsuits or claims by your suppliers for unpaid bills. Running your business as an LLC may help you sleep better because it instantly gives you personal protection against these and other potential claims against your business.

Not all businesses can operate as LLCs, however. Businesses in the banking, trust, and insurance industry, for example, are typically prohibited from forming LLCs.

Should I choose an LLC or an S-corporation?

While the S-corporation's special tax status eliminates double taxation, it lacks the flexibility of an LLC in allocating income to the owners.

An LLC may offer several classes of membership interests while an S-corporation may only have one class of stock.

Any number of individuals or entities may own interests in an LLC. However, ownership interest in an S-corporation is limited to no more than 100 shareholders. Also, S-corporations cannot be owned by C-corporations, other S-corporations, many trusts, LLCs, partnerships, or nonresident aliens. Also, LLCs are allowed to have subsidiaries without restriction.

What is an LLC Operating Agreement?

An LLC operating agreement allows you to structure your financial and working relationships with your co-owners in a way that suits your business. In your operating agreement, you and your co-owners establish each owner's percentage of ownership in the LLC, his or her share of profits (or losses), his or her rights and responsibilities, and what will happen to the business if one of you leaves.

Do I need to have an Operating Agreement?

Although most states' LLC laws don't require a written operating agreement, you shouldn't consider starting business without one. Here's why an operating agreement is necessary:

It helps to ensure that courts will respect your personal liability protection by showing that you have been conscientious about organizing your LLC.
It sets out rules that govern how profits will be split up, how major business decisions will be made, and the procedures for handling the departure and addition of members.
It helps to avert misunderstandings between the owners over finances and management.
It keeps your LLC from being governed by the default rules in your state's LLC laws, which might not be to your benefit.

Must I hold LLC meetings?

Although a corporation's failure to hold shareholder or director meetings may subject the corporation to alter ego liability, this is not the case for LLCs in many states. In California for example, an LLC's failure to hold meetings of members or managers is not usually considered grounds for imposing the alter ego doctrine where the LLC's Articles of Organization or Operating Agreement do not expressly require such meetings.

Exceptions to Limited Liability

While LLC owners enjoy limited personal liability for many of their business transactions, it is important to realize that this protection is not absolute. This drawback is not unique to LLCs, however -- the same exceptions apply to corporations. An LLC owner can be held personally liable if he or she:

personally and directly injures someone
personally guarantees a bank loan or a business debt on which the LLC defaults
fails to deposit taxes withheld from employees' wages
intentionally does something fraudulent, illegal, or clearly wrong-headed that causes harm to the company or to someone else, or
treats the LLC as an extension of his or her personal affairs, rather than as a separate legal entity.

This last exception is the most important. In some circumstances, a court might say that the LLC doesn't really exist and find that its owners are really doing business as individuals, who are personally liable for their acts. To keep this from happening, make sure you and your co-owners:
Act fairly and legally. Do not conceal or misrepresent material facts or the state of your finances to vendors, creditors, or other outsiders.
Fund your LLC adequately. Invest enough cash into the business so that your LLC can meet foreseeable expenses and liabilities.
Keep LLC and personal business separate. Get a federal employer identification number, open up a business-only checking account, and keep your personal finances out of your LLC accounting books.
Create an operating agreement. Having a formal written operating agreement lends credibility to your LLC's separate existence.
A good liability insurance policy can shield your personal assets when limited liability protection does not. For instance, if you are a massage therapist and you accidentally injure a client's back; your liability insurance policy should cover you. Insurance can also protect your personal assets in the event that your limited liability status is ignored by a court.

In addition to protecting your personal assets in such situations, insurance can protect your corporate assets from lawsuits and claims. Be aware, however, that commercial insurance usually does not protect personal or corporate assets from unpaid business debts, whether or not they're personally guaranteed.

Home Owners

Buying a Home

How much should I spend on my next home?

The first step is to think about how much you can afford to pay out each month for a mortgage payment. Keep in mind that a mortgage payment typically includes property taxes and mortgage insurance as well as the mortgage payment itself. The general rule of thumb is that no more than 30 percent of your gross monthly income should be spent on housing expenses.

If you plan to borrow money from a lender then you might want to consider getting pre-qualified. Pre-qualification is helpful to the buyer for planning purposes because it gives you an estimate of the maximum mortgage amount you can afford based on your current financial situation. Unlike a pre-approval, pre-qualification is not a commitment on the part of the lender, but it does give you an idea of the mortgage amount you probably qualify for. Knowing this information in advance can help you figure out a price range for your new home.

When you're figuring out a price range, don't forget to take into account any amount you apply as part of a down payment. You will want to save as possible for a down payment. The reasons for this are two-fold: first, lenders will not require you to pay for private mortgage insurance if you can come up with a 20 percent down payment; second, the sooner you pay off your mortgage, the better off you are financially.

Once you've figured out a price range let your real estate agent know what it is, but don't be afraid to look at homes that are 15 percent to 20 percent over your price range. In many cases, you will be able to negotiate the price down.

How can I find a good real estate agent when buying a home?

As a home buyer you pay a commission to the agent, so you want to make sure you are getting your money's worth. What you need is an agent who is competent and experienced, and whose way of working is compatible with your own. If you're working with a real estate agent that you feel is not doing his or her best to find you the home you want, then don't hesitate to find a new one.

When looking for a real estate agent ask yourself the following:

Is the Agent Full-Time? Is the Agent Experienced?

Look for an agent with at least a few years of full-time experience. As with many professions, real estate agents acquire most of their skills on the job.

Does the Agent Listen, and Communicate Clearly?

The agent must understand what's important to you in your home purchase and be able to tell you what you need to know about a home.

Is the Agent Willing to Negotiate For You?

To get the best home for the best price you'll have to negotiate with the seller. If the agent is not willing to show you houses that are 20 percent over your price range or to go to bat for you when negotiating with the seller, you should find a new agent.

Is the Agent Careful In His or Her Work?

You need an agent who will cover all the details that go into buying a home.

Can I save money by buying a home without a real estate agent?

You can shop for and buy a home without a real estate agent, but keep in mind that it will be more time-consuming. Homebuyers who already have a property in mind that they want to buy are the best candidates to forgo an agent, but if you're willing to do the extra legwork such as searching for properties, scheduling appointments to see them, coordinating inspections, and negotiating, then it's probably worth a try.

How can I negotiate the lowest price when buying a home?

Here are some negotiating tips:

Be willing to walk away from a deal. If you decide you must have a certain house, you have already lost negotiating power. There are other good properties out there.
Learn everything you can about the property before making your offer. For instance, how long has it been on the market? Has the buyer dropped the asking price? Why is the owner selling? The answers to these questions will help you to negotiate.
Know what comparable homes are selling for.
When the seller won't budge on price try to negotiate something else. For instance, try to get the seller to pay for repairs or improvements you would have done yourself.
Don't forget the real estate agent's commission. This is negotiable, too.

Should I have the home I want to buy inspected?

The purchase of a home is probably the largest single investment you will ever make. You should learn as much as you can about the condition of the property and the need for any major repairs before you buy.

The standard home inspector's report will include an evaluation of the condition of the home's heating system, central air conditioning system (temperature permitting), interior plumbing and electrical systems; the roof, attic, and visible insulation; walls, ceilings, floors, windows and doors; the foundation, basement, and visible structure.

The inspection fee for a typical one-family house varies by region and may also vary depending upon the size of the house, particular features of the house, its age, and whether additional services are required such as septic, well, or radon testing. The knowledge gained from an inspection is well worth the cost, however.

Not all states require home inspectors to be licensed or certified. When hiring a house inspector, qualifications, including experience, training, and professional affiliations, should be the most important considerations. One organization that can help you find a qualified home inspector is the American Society of Home Inspectors (ASHI). You can contact them through their website: www.ashi.org

What should I watch out for when dealing with home contractors?

Once you find a home you may want to do some remodeling or updating. Before you get started, however, make sure that the remodeling you're doing is something that the average home buyer wants such as a modern kitchen, larger closets, and modernized or additional bathrooms. Improvements in electrical wiring are also a plus, and when redecorating, keep future buyers in mind and use neutral colors.

Do not pay the contractor too much money upfront.

Before you sign a contract, work out a detailed plan that includes a target date for finishing various portions of the job, and a payment schedule as well. The contract should detail the costs of materials and labor so that you know what the contractor's profit will be. The final payment should be due on completion and should be the largest payment.

Don't contract with someone who's not bonded, licensed, and insured.

To find out whether a contractor is licensed, you can contact either a state licensing agency or check with a consumer protection agency to find out whether complaints have been filed against that contractor. Always ask to see copies of insurance policies.

Ask for as much detail as possible from the contractor about what the job will entail.

You never know what you'll find when you rip open that 30-year-old wall or start replacing that electrical wiring. On a big project, hire an independent engineer to inspect the work. If you don't, you could regret it later if the work has to be redone at your expense because it's not up to code.

How much should I expect to pay in closing costs?

Closing costs vary by state and by lender so it pays to shop around if possible. In addition, many of the fees associated with closing costs are negotiable such as credit checks, application fees, title searches, broker fees, appraisals, and other processing fees. Property taxes, homeowners' insurance (usually paid one year in advance), and private mortgage insurance (PMI) are not negotiable. One of the largest closing costs is likely to be the origination fee, which is typically 1 percent of the mortgage. You may also pay from 1 to 3 points or 1 percent to 3 percent in up-front interest. If you put less than 20 percent down, you will also need private mortgage insurance, which includes a one-time fee of up to 1 point plus a specific dollar amount that is included in your monthly mortgage payment.

Your lender must send you an estimate of your closing costs, referred to as a GFE or Good Faith Estimate (required by law), within three days of receiving your application and your realtor, lawyer, or escrow agent will give you the exact amount of your closing costs before closing. If you have only enough cash for a down payment, you can fold closing costs into your mortgage, but you will have to pay a higher interest rate. You can also ask the seller to pay some of the closing costs when you are negotiating your price.

Should I buy or rent?

Depending on your particular situation, owning a home makes might make more economic sense than renting one. With home prices dropping and mortgage rates at historically low rates, people who are planning to stay in their homes long-term can build equity over time and reap the benefits of writing off mortgage interest on their taxes. A modest increase in value represents an even greater gain for people who make a typical down payment of 20 percent or less. The higher your income tax bracket, the better your return.

You may want to rent however if you can find cheap housing, such as a rent-controlled apartment or the cost of renting is substantially less than owning. If you are young and single, newly divorced, move often with your job, or just don't want the responsibility of home ownership, then renting probably makes more sense. It's tough to recover the costs of buying a home within the first five to seven years, so if you're planning on moving before then renting is a better option. Retirees also may want to sell the family homestead and invest the proceeds. If you live in an area where housing prices are falling, then wait until the market bottoms out before you buy.

Mortgages

How can I minimize problems when getting a mortgage?

Much of the information required by your lender can be brought with you when you apply for a loan. To avoid delays, try to find out in advance exactly what documentation the lender will require from you. In general, however, most lenders will ask for the following documents:

The purchase contract for the house
Bank account numbers, name and address of your bank branch and your latest bank statement, pay stubs, W-2 forms, or other proof of employment and salary.
If you are self-employed, balance sheets and tax returns for 2-3 previous years.
Information about debts, including loan and credit card account numbers and the names and addresses of your creditors.
Evidence (such as canceled checks) of mortgage or rental payments you currently pay.
Certificate of Eligibility from the Veterans Administration if you want a VA-guaranteed loan.

Ask the lender what is the average time for processing loans and what time frame you can reasonably expect your loan to be approved in.
People who are rejected for a mortgage loan often find that it is due to problems with their credit score. To circumvent potential problems, several months before applying for a mortgage try to pay down your credit cards, but do not close them. Although it may seem counterintuitive, closing them can negatively affect your credit score. Obtain a copy of your credit report so you can dispute any errors you find. Do not apply for credit unless you really need it and start paying bills on time if you do not already do so. Your recent history is counted heavily. If your credit history is sparse, take out a small loan or obtain a bank credit card or store charge card and make timely payments. Try not to change jobs.

How can I lock in a mortgage rate most effectively?

A lock-in, also called a rate-lock or rate commitment is a lender's promise to hold a specific interest rate and number of points for you while your loan application is processed. A lock-in is typically held for a specific amount of time as well. A lock-in that is quoted when you apply for a loan may be useful because during that time the mortgage rates may change and it's likely to take your lender several weeks or longer to prepare, document, and evaluate your loan application.

But if your interest rate and points are locked in and rates increase you will be protected while your application is processed. Remember, however, that a locked-in rate could also prevent you from taking advantage of decreases in the interest rate unless your lender is willing to lock in a lower rate that becomes available during this period.

When considering a lock-in, ask the following questions:

Does the lender offer a lock-in of the interest rate and points?
When will the lender let you lock in the interest rate and points?
Will the lock-in be in writing?
Does the lender charge a fee to lock in the interest rate?
Does the fee increase for longer lock-in periods?
If so, how much? If you have locked in a rate, and the lender's rate drops, can you lock in at the lower rate?
Does the lender charge an additional fee to lock in the lower rate?
Can you float your interest rate and points for now and lock them in later?
What rate will be charged if the lock-in expires before settlement? Will it be the rate in effect when the lock-in expires?
If you don't settle within the lock-in period, will the lender refund some or all of your application or lock-in fees if you decide to cancel the loan application?
If your lock-in expires and you want to get another lock-in at the rate in effect at the time of the expiration, will the lender charge an additional fee for the second lock-in?

Disclosures and the Right of Rescission. The lender is obligated by the Truth in Lending Act to provide you with a written statement with a list of all of the costs associated with the loan and the terms of financing. This statement must be delivered to you before the settlement. You will want to carefully review the disclosure that you are given before you sign. This disclosure will have all of the pertinent information about your loan, the finance charge, the amount financed, the payment schedule and the APR. If you are buying a home with a mortgage, you do not have a right to cancel the loan once the closing documents are signed. If you are refinancing a mortgage, you have until midnight of the third business day after the transaction to rescind (cancel) the mortgage contract.

How are escrow payments calculated?

An escrow account is a fund that your lender establishes in order to pay property taxes and hazard insurance as they become due on your home during the year. The lender uses the escrow account to safeguard its investment, which is your home. Similarly, if you neglected to pay the hazard insurance premium, then a fire or flood that destroyed your home also would destroy the lender's security for the loan.

The goal of the escrow account is to have enough money to pay taxes and insurance when they become due. To achieve this, the lender adds one-twelfth of the tax and insurance amount to your mortgage payment each month. For example, if your taxes and insurance are $1,200 per year, the lender would collect $1,200 in twelve installments of $100 per month.

To cover possible tax or insurance increases, the federal Real Estate Settlement Procedures Act (RESPA) permits the lender to add to the yearly amount two months of extra payments prorated monthly. So, the lender would collect an additional $200 divided by 12, or $16.67 per month, for a total escrow payment of $116.67 per month.

Mortgage services are required by federal law to make payments for taxes, insurance, and any other escrowed items on time. Within 45 days of establishing the account, the servicer must give you a statement that clearly itemizes the estimated taxes, insurance premiums and other anticipated amounts to be paid over the next 12 months, and the expected dates and totals of those payments.

You should also receive a free annual statement from the mortgage services that outlines activity in your escrow account such as account balances and when payments were made for property taxes, homeowners insurance, and other escrowed items.

To determine if you are being charged correctly, compare your escrow payments with what you owe annually on your hazard insurance and property taxes. You can get this information from your local tax authority and your insurance company. If the lender charges you substantially less than the required amount, you will need to pay an additional lump sum at the end of the year. If the lender charges you substantially more, it may tie up your money unfairly, as well as violate the RESPA regulations.

What should I do if my bank or other mortgage lender sells my mortgage?

To protect borrowers, the National Affordable Housing Act requires lenders or mortgage servicers (the company that borrowers pay their mortgage loan payments to) to do the following.

They must provide a disclosure statement that says whether the lender intends to sell the mortgage servicing immediately; whether the mortgage servicing can be sold at any time during the life of the loan; and the percentage of loans the lender has sold previously.
The lender also must provide information about servicing procedures, transfer practices, and complaint resolution.

They must notify you at least 15 days before they sell your loan unless you received a written transfer notice at settlement. If your loan servicing is going to be sold, you should receive two notices, one from the current mortgage servicer and one from the new mortgage servicer. The new servicer must notify you not more than 15 days after the transfer has occurred.

The notices must include the following information:
The name and address of the new servicer.
The date the current servicer will stop accepting mortgage payments, and the date the new servicer will begin accepting them.
Toll-free or collect call telephone numbers for both the current servicer and the new servicer that you can call for information about the transfer of service.
Information about whether you can continue any optional insurance, such as credit life or disability insurance; what action you must take to maintain coverage; and whether the insurance terms will change.
A statement that the transfer will not affect any terms or conditions of the contract you signed with the original mortgage company, other than terms directly related to the servicing of such loan.

For example, if your old lender did not require an escrow account, but allowed you to pay property taxes and insurance premiums on your own, the new servicer cannot demand that you establish such an account. They must grant a 60-day grace period, in which you cannot be charged a late fee if you mistakenly send your mortgage payment to the old mortgage servicer instead of the new one.
If you believe you have been improperly charged a penalty or late fee, or there are other problems with the servicing of your loan, contact your servicer in writing. Include your account number and explain why you believe your account is incorrect.

Within 20 business days of receiving your inquiry, the servicer must send you a written response acknowledging your inquiry. Within 60 business days, the servicer must either correct your account or determine that it is accurate. The servicer must send you a written notice of what action it took and why.

If you believe the servicer has not responded appropriately to your written inquiry, contact your local or state consumer protection office. You can also file a complaint with the FTC. Or, you may want to contact an attorney to advise you of your legal rights. Under the National Affordable Housing Act, consumers can initiate class-action suits and obtain actual damages, plus additional damages, for a pattern or practice of noncompliance.

When can I stop paying Private Mortgage Insurance (PMI)?

Generally, if you make a down payment of less than 20 percent when buying a home, the lender will require you to buy private mortgage insurance (PMI). You can usually drop the PMI when your home equity is more than 20 percent. Making extra payments, home improvements, and appreciation can all help increase equity and reduce the length of time that you have to pay PMI. Thanks to new regulations, it's now easier for people to cancel PMI when their home equity reaches 20 percent; however, some government-insured loans such as FHA and VA loans require that homeowners pay PMI for the life of the loan.

To find out whether you can cancel PMI, call your lender or mortgage servicing company (the company to which you send your mortgage payments) and ask what steps you need to take to cancel it. You will be required to request it in writing, but by calling first you can make sure you have included all of the necessary information when you submit your request.

In most cases, you will be required to pay for a formal appraisal. When you call the lender ask whether you can set up the appraisal or if it's something the lender needs to do. Lenders also take a close look at your payment history, so it's important to have made your payments on time. One other thing to keep in mind is that if you rent your home out, most lenders will require a higher equity percentage before dropping PMI.

If your request is approved, you will receive any prepaid premiums that are in your escrow account.

How can I avoid paying Private Mortgage Insurance (PMI)?

Lenders usually require private mortgage insurance if the loan is more than 80 percent of the home's purchase price, but even if you don't have the standard 20 percent down-payment, you can avoid paying private mortgage insurance in other ways. Some buyers go for 80-10-10 financing, which means that they put 10 percent down and take out a first mortgage for 80 percent of the purchase price. Sellers sometimes will carry a 10 percent second mortgage. Otherwise, you can finance the remainder through institutional lenders, which often charge a point above the first mortgage's rate.

If you only have 5 percent to put down, you may still be able to do the deal. You will pay a much higher interest rate on a 15 percent second mortgage, however.

Should I prepay my mortgage?

As a general rule, if you are able to prepay your mortgage (and if there is no penalty for prepayment), it makes good financial sense to prepay as much as you can every month, but there are some exceptions. For example:

1: You do not have an emergency fund stashed away. Once you've put away three to six months' worth of living expenses, then you can begin paying down your mortgage.

2: You have a large amount of credit card debt. In such a case, all of your extra funds should be used to pay down those debts.

3: There are a few individuals who might be better off not paying down their mortgages since they will achieve a better return by investing that money elsewhere. Whether an investor fits into this category depends on his or her marginal tax rate, mortgage interest rate, return achievable on investments, and long-term investment goals.

When should I refinance my home?

Refinancing becomes worth your while if the current interest rate on your mortgage is at least two percentage points higher than the prevailing market rate. Talk to several lenders to find out the current refinancing rates and what costs are associated with refinancing. Costs can include items such as appraisals, attorney's fees, and points.

Once you have an estimate of what the costs might be, figure out what your new payment would be if you were to refinance. You can estimate how long it will take to recover the costs of refinancing by dividing your closing costs by the difference between your new and old payments (your monthly savings). Be aware, however, that the amount you ultimately save depends on many factors, including your total refinancing costs, whether you sell your home in the near future, and the effects of refinancing on your taxes.

Refinancing can be a good idea for homeowners who want to get out of a high-interest rate loan to take advantage of lower rates or those who have an adjustable-rate mortgage (ARM) and want a fixed-rate loan in order to know exactly what the mortgage payment will be for the life of the loan. It is also a good idea for those who want to convert to an ARM with a lower interest rate or more protective features than the ARM they currently have. Finally, refinancing is recommended for those who want to build up equity more quickly by converting to a loan with a shorter term or want to draw on the equity built up in their house to get cash for a major purchase or for their children's education.

Should I pay off my mortgage?

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What are the different options for mortgages?

There are two basic kinds of mortgages: fixed-rate and adjustable. Fixed-rate mortgages carry the lowest risk and are an especially good deal when interest rates are low. Adjustable-rate mortgages typically cost less, but they can become expensive if interest rates rise substantially. Some of them also amortize negatively, which means that your payment does not cover all of the loan's interest for the month. Your balance will increase, and you will owe interest on the interest. You can get either loan for different terms, typically 15 or 30 years.

There are now many different kinds of mortgages that combine aspects of both fixed-rate and adjustable loans. A mortgage may start as a fixed-rate loan, for example, and then convert to an adjustable after several years. One loan that has been around a long time is a balloon mortgage. It has low, fixed payments for a period of years, and then the entire loan comes due. Considered very risky, it is sometimes used by a seller to help a buyer with the down payment. Banks now offer balloon mortgages that can convert to fixed-rate or adjustable mortgages.

How do I choose between low rates and low points on a mortgage?

Get a lower interest rate and pay more points if you intend to live in your house for a long time. Points are an up-front interest fee that generally increases as the mortgage interest rate decreases. Trading this fee for a higher interest rate will cost more over the life of the loan.

If you plan to be in your house for less than five years, however, it is less expensive in the long run to avoid paying points by taking a higher interest rate. You also might want to take the higher interest rate if it means you can then put enough cash down to avoid private mortgage insurance.

Which mortgage is best for me?

It may depend on how much risk you can tolerate. A traditional 30-year, fixed-rate mortgage is still the safest way to go. Your monthly payment stays the same for the life of the loan. You are protected from increases in interest rates, and if rates go lower, you can always refinance.

An adjustable-rate mortgage, or ARM, is riskier but often less costly. ARMs typically offer below-market teaser rates and then adjust according to current interest rates as often as every few months. These loans set caps on the interest rate and the amount it can ratchet up each period. Be careful of loans that have payment caps because they can leave you owing more money on your mortgage each time you make a payment if interest rates rise quickly. ARMs are best for people who need initially lower monthly payments, who expect their income to rise, or who expect to live in their home for five years or less.

Mortgages with 30-year terms are still the most popular although 15-year mortgages are gaining favor among people who want to build equity faster at a lower cost. Many homeowners with 30-year mortgages, however, can also lower their costs and shorten the term of their loans by paying extra each month.

Homeowner's Insurance

How can I get the best homeowner's insurance at the best price?

The price you pay for homeowner's insurance can vary by hundreds of dollars, depending on the insurance company you buy your policy from. One tip is to ask your insurance agent or company representative about discounts available to you, but there are many others, some of which are listed below.

Shop around
Raise your deductibles
Buy home and auto policies from the same company
Check a home's insurance cost prior to purchase
Don't insure land
Increase home security
Stop smoking
Check your policy once a year

How much homeowner's insurance should I buy?

Insure For 100 percent of Rebuilding Costs

The amount of insurance you buy should be based on the cost of rebuilding, and not on the price of your home. The cost of rebuilding your house may be higher (or lower) than the price you paid for it or the price you could sell it for today.

Do You Have a Replacement Cost Policy?

Most policies cover replacement cost for structural damage but check with your insurance agent to make sure your policy does this. A replacement cost policy will pay for the repair or replacement of damaged property with materials of similar kind and quality. The insurance company won't deduct for depreciation (the decrease in value due to age, wear and tear, and other factors).

Find Out About Flood Insurance

If your home is in an area prone to flooding, contact your insurance agent or the Federal Insurance Administration at (800) 638-6620 and ask about the National Flood Insurance Program.

How can I make sure my homeowner's insurance is adequate?

Check Your Policy and Keep Your Agent Informed

Make sure your agent knows about any improvements or additions to your house that have been made since you last discussed your insurance policy.

Look at your policy to see what the maximum amount is that your insurance company would pay if your house was damaged and had to be rebuilt. The limits of the policy usually appear on the Declarations Page under Section 1, Coverage, Dwelling. Your insurance company will pay up to this amount to rebuild your home.

Contents Insurance: Make a List of All Your Personal Possessions

This includes everything you and your household own in your home and in other buildings on the property, except your car and certain boats, which must be insured separately. Among the things you should include are indoor and outdoor furniture; appliances, stereos, computers and other electronic equipment; hobby materials and recreational equipment; china, linens, silverware, and kitchen equipment; and jewelry, clothing and other personal belongings.

Check Your Policy for Special Limits

Check the limits on certain kinds of personal possessions, such as jewelry, artwork, silverware, and furs.

This information is in Section 1, Personal Property, Special Limits of Liability. Some insurance companies also place a limit on what they'll pay for computers and other home office equipment.

If the limits are too low, consider buying a special personal property "endorsement" or "floater."

How Should I shop for a Home Insurer?

First, do some preliminary research. Start by making a list of insurers to call. Ask your friends about their insurers, search online, check the Yellow Pages, or call your state insurance department. Also, check consumer guides. You can also check with an independent agent.

When talking to insurers, ask them what they could do to lower your costs. Once you've narrowed your search to three companies, get price quotes.

Tip: Don't consider price alone. The insurer you select should offer both a fair price and excellent service. Quality service may cost a bit more, but it provides added conveniences. Talking to insurers will give you a feel for the type of service they offer.

How much of a homeowner's deductible should I have?

Deductibles on homeowners' policies typically start at $250. Increasing your deductible saves you money.

Should I buy home and auto policies from the same company?

Some companies that sell homeowner's, auto, and liability coverage will take 5 to 15 percent off your premium if you buy two or more policies from them.

Should insurance costs be a factor in the home purchase decision?

A new home's electrical system and plumbing, as well as its structure, are usually in better shape than those of an older house, so insurers may offer you a discount of 8 to 15 percent for a new home. Check the home's construction. Brick houses may result in less costly premiums in the East; frame houses are less costly in the West. Choosing wisely could cut your premium by 5 to 15 percent. Avoiding areas that are prone to floods can save you money as well.

Does your town have full-time or volunteer fire service? Is the home close to a hydrant or fire station? The closer it is to either of these, the lower your premium will be.

Should I insure the entire home cost including land?

Insuring the value of the land under your house is not necessary because land isn't at risk from theft, windstorm, fire or other disasters.

Does home security reduce insurance cost?

You can usually get discounts of at least 5 percent for a smoke detector, burglar alarm, or dead-bolt locks. Some companies offer to cut your premium by as much as 15 or 20 percent if you install a sophisticated sprinkler system and a fire and burglar alarm that rings at the police station or another monitoring facility. These systems are not inexpensive, and you should also be aware that not every system qualifies for the discount.

Tip: Before you buy an alarm system, find out what kind your insurer recommends and how much you'd save on premiums.

Do home insurers offer discounts for non-smokers?

Some insurers offer to reduce premiums if all the residents in a house don't smoke. Ask your insurer if this discount is available.

How often should I review my homeowner's policy?

Compare the limits in your policy with the value of your possessions at least once a year, to make sure your policy covers major purchases or additions to your home.

Tip: On the other hand, you don't want to spend money for coverage you don't need. If your five-year-old fur coat is no longer worth the $20,000 you paid for it, reduce your floater and pocket the difference

Should I buy private or governmental sponsored storm insurance?

If you live in a high-risk area, one vulnerable to coastal storms, fires, or crime, for instance, and have been buying your homeowner's insurance through a government plan, you may find that there are steps you can take to allow you to buy insurance at a lower price in the private market. Check with your insurance agent.

Selling Your Home

How do I find a good real estate agent when I sell my home?

First, ask friends, family, and colleagues for recommendations of real estate agents. You can also look for names listed on posted "for sale" signs, especially for houses that have been sold. Once you have at least three names, schedule a telephone or in-person interview with the agent.

Ask the real estate agent what problems she or he sees in marketing your home. The broker should be honest about potential problems and be able to think creatively about solutions. Ask for a plan for marketing the home and what you as a homeowner can do to help implement the plan. Listen to the answers. Does the agent exhibit a willingness to think creatively in approaching whatever problems might exist with the selling process? Does she seem co-operative or receptive to your input? Other things to consider are whether the broker knows the good and bad points about your neighborhood or town. And last but not least, don't forget to ask the broker for a list of comparable homes, which is essential in helping you arrive at an asking price for your home.

Which type of listing agreement should I enter into with the real estate agent?

A listing agreement is a contract between the homeowner and the agent. It states how much the agent will be paid and what services are provided. You will generally have to enter into an exclusive listing, which gives the agent the exclusive right to sell your house for a limited period of time. The listing agent gets 100 percent of the commission if he or she sells the house and a percentage of the commission if another broker sells the house.

Establish a time limit of three months for an exclusive right to sell agreement. This will give the broker an incentive to sell the home quickly and still gives you an out if you feel the broker isn't doing enough for you. If you have a lot of confidence in the broker, and you have seen and approved of his or her plans for marketing the home, you may wish to sign for six months.

If at any time during the marketing process, you feel that your broker is not as effective as he or she could be, switch brokers. Do not waste time with a broker you have doubts about.

How can I speed up the sale of my home?

Make cosmetic improvements to get the house looking as good as possible. For instance, patch damaged plaster and drywall, repaint, and re-wallpaper. Spruce up the exterior by replacing broken shingles or shutters or doing some minor landscaping to give your home more "curb appeal."

Increase your home's appeal to a wider range of potential buyers. Repair or replace any part of your home that's been modified that might not appeal to the general population.

Make your home cozy and inviting when potentials buyers come by. Make sure the interior and exterior are clean, neat, and well maintained. Have a fire burning in the fireplace, bake some cookies or an apple pie, or have a pot of coffee brewing. Put away toys and tools. Keep pets out of sight. Not everyone is as enamored of Fido as your family is. Try not to cook foods like fish with lingering odors.

You can also work with your broker to speed up the sale of your home using the following techniques:

Offer a warranty. Sometimes offering a warranty on the roof, electrical system, or appliances can speed up a sale or smooth the negotiating process, particularly if it's causing buyers to balk at the asking price.

Create a home sale kit with your broker. A home sale kit consists of flyers that are distributed to potential home buyers and contain photos of your home's exterior, interior, and surroundings. The flyer should also list major selling points and include information about utility costs, taxes, and a floor plan.

Let the broker show your home. Allow the broker to do his or her job. Make yourself available for questions, but do not try to help sell to potential buyers who are looking at your home.

Offer a bonus to your broker. A bonus shouldn't be obvious to the buyer because the buyer will wonder if the house price has been bumped up to accommodate the real estate broker's bonus. Instead, offer the bonus in the form of an increased commission, say 3 1/2 percent instead of 3 percent.

Take it off the market and re-list it later. If your house has been on the market for a long time, it may be perceived as undesirable. Taking it off the market and re-listing it at a later time sometimes helps.

How do I get the best price for my home?

Use one of these successful methods for negotiating with buyers, once they've made their first offer:

Find out as much as possible about the potential buyer. Try to find out, for example, whether the buyer needs to buy a home quickly or is in a position to take plenty of time to negotiate. This will help you to decide what type of negotiating stance to take. Knowing details about the buyer's family will help you point out how your home accommodates their needs. And, if you know that a buyer lives in an apartment and will need to buy appliances for their new home, then you can throw in deal sweeteners such as refrigerators, washer and dryers, and furnishings.

Avoid being confrontational. The offers you receive will likely be 10 to 15 percent below your asking price. Do not be offended by this or by any "low-balling" techniques engaged in by buyers. Be willing to make some concessions. Make counter-offers to try to bring the offer closer to your asking price. If you feel that an offer is unreasonable, however, you can always reject it outright and wait for another buyer.

Reveal as little as possible about your own situation.

Planning Your Move

How can I get the best deal when hiring a moving company?

Even though your moving date may be months away, as soon as soon as the contracts are signed you should start getting recommendations for moving companies from friends or colleagues.

Start calling movers for estimates.

Once you have a list of recommendations, call each one to get an estimate of how much your move will cost. You'll have to provide them with the number of miles involved in the move and the approximate weight of your belongings. The mover will help you in making this estimate.

Ask about extra charges that apply.

Movers typically charge extra for flights of stairs, heavy items, pianos and other special items. Be aware of the fact that having the movers pack for you increases your moving bill by about 30 percent. You may also have to pay a premium if you schedule your move during busy moving times, generally after the 25th of the month or before the 2nd.

Do not use a mover whose estimate seems too low.

The services provided may be second rate. If it seems too good to be true it probably is.

How can I minimize problems when I move?

As soon as you schedule your move:

Tag any items you are leaving behind for the new owners.
If your move is job-related, find out whether your employer will reimburse you for part of the cost.
Save any receipts relating to the move since part of the cost will be deductible on your taxes when you file.
Start shopping around for a new bank in your new neighborhood.
Get a change of address kit from the post office and begin notifying people of your impending change of address. You will need to notify credit card companies, banks, and other financial institutions directly.
Call schools in your new location and enroll your children.
Get copies of your medical and dental records (and veterinary records if you have pets). Be sure your move is covered by insurance--either the moving company's insurance or your homeowner's insurance.
Call your insurance agent and take care of transferring homeowner's insurance to your new home.

As you get closer to the date of your move:
Call utility companies and give them a date to turn on service at your new home and terminate service at your old home.
Switch your direct payroll deposit, and any automatic payments, to your new checking account.
Two or three days before you move, take money out of your old bank account and transfer it to your new bank account. Be sure to leave your new address with the old bank.
Shop for auto insurance in the new area (if moving out of state).
Transfer your brokerage account to your new area if you use a local broker.
Defrost your refrigerator.
On moving day, check your contract with the mover. Be sure the total cost of the move is clearly detailed and that the moving date, location, and insurance information are all correct.

Whom should I notify of a new address?

Here is a list of people you should notify when you change your address and phone number. Although the list is not all-inclusive, it can be used as a starting point.

The IRS-use Form 8822-and state and local taxing authorities
The U.S. Post OfficeInsurance agents (home, auto, and life)
Debtors and creditors-mortgage holders, car lien holders, other lenders
Credit card companies
Publications
Clubs and services to which you subscribe
The Social Security Administration
Any organization that periodically mails you a check
Banks
Employers
Doctors, dentists, veterinarians
Motor vehicle departments
Places of worship and non-profit organizations you are involved with
The registrar of voters
Utilities, telephone service, answering service, and trash collectors
Your CPA, attorney, and broker

Financial Planning

Developing a Financial Plan

How do I determine my long-term financial goals?

The first step is to decide what you realistically want to achieve financially. Financial goals might include early retirement, travel, a vacation home, securing your family's financial comfort on the death of a bread-winner, planning for the care of elderly relatives or building a family business.

Is there any validity to financial planning "rules of thumb" such as "saving 10 percent of your gross income?"

The following rules of thumb may work for some people, but they do not make financial sense for everyone. What is more important is to be able to know whether a particular rule of thumb suits your situation. Here are six of the more common rules along with some considerations that should not be overlooked.

1. Life insurance should equal five times your yearly salary.

This rule of thumb has been used to answer the question: How much life insurance should I have? The ideal amount of life insurance is the amount that will, when invested, generate enough income to allow your survivors to maintain the level of income they are used to. "Five times your salary" will accomplish this objective in some cases, but there is no substitute for making the calculations necessary to find out how much life insurance you need to buy for your particular situation. The amount of life insurance you need depends on how many people there are in your family, whether there are other sources of income besides your salary, how old your children are, and a few other factors.

2. Save 10 percent of your salary per year.

You may need to save much more than ten percent of your gross income to have a comfortable retirement. The amount you need to save for retirement depends on how large your existing nest egg is and how old you are. Those who started saving late in life, for instance in their 40s, need to save at least 15 or 20 percent per year.

3. Contribute as much as you can to retirement plans.

This makes sense for most people, but if you've accumulated a large amount of money in a retirement plan, say close to a million dollars, you may reach the point where the negatives of contributing to your retirement plan savings outweigh the positives.

4. You need 80 percent of your pre-retirement income to retire comfortably.

Although people may need 80 percent of their salaries during the first few years of retirement, later on, they are often able to live comfortably on less. The amount of income you need depends on whether you have paid off your mortgage, whether you will have other sources of retirement income, and other factors.

5. Subtract your age from 100 and invest that percentage in stocks.

This is one of those "cookie cutter" rules that only pans out for certain investors. For others, it results in a portfolio that is much too conservative. The best method of allocating percentages among various types of investments depends on your investment goals and needs and your willingness to risk your capital. In this case, rules of thumb do not serve the investor very well at all.

6. Maintain an emergency fund of six months' worth of expenses.

Depending on your family's situation, three months' worth of expenses might be enough. On the other hand, for some families, even six months' worth might be totally inadequate. The amount you should keep on hand depends on how easy it would be for you to take out a short-term loan and how much money you have in savings and investments among other things.

Do not rely on any rule of thumb to make financial decisions. Instead consider carefully what your needs and goals are, and then calculate what you'll need to do to fulfill them.

What do women in particular need to keep in mind with regard to financial planning?

With more women remaining single, nearly half of all marriages ending in divorce, and the odds of becoming a widow by the age of 55 hovering around 75 percent, nearly 9 out of 10 women will be solely responsible for their financial well-being at some point in their lives. But many are ill-prepared to do so.

Here are several areas where women fall behind when it comes to planning for their financial future:

Women save considerably less for retirement, on average 60 percent less than men according to a 2010 study conducted by LIMRA of close to 2,500 employees. This is significant because women typically live longer than their male counterparts and need more retirement savings.
In that same LIMRA study, 29 percent of men and only 14 percent of women consider themselves knowledgeable about financial services and products. Fifty-four percent of women felt at least somewhat knowledgeable about financial products and services, but nearly three-quarters of men felt the same way.
And, in 2011 a Harris Interactive survey commissioned by RocketLawyer.com found that of the more than 1,000 people surveyed, 5 percent of the women do not have a will, 26 percent of them citing cost as the primary reason they don't have one.

What special problems do unmarried couples have to be concerned with in financial and estate planning?

In 2016, 18 million adults were cohabiting, according to a new Pew Research Center analysis of the Current Population Survey. This represents an increase of 29 percent since 2007. Because unmarried couples don't enjoy the same legal rights and protection as married couples do, financial planning considerations for issues such as retirement planning, estate planning, and taxes can be quite different. For example:

Unmarried partners do not automatically inherit each other's property. When an unmarried partner dies intestate (without a will) the estate is divided according to laws of the state, with property and assets typically going to parents or siblings and rarely or never to the beloved partner. In other words, married couples who do not have a will have state intestacy laws to back them up, but unmarried couples need to have a will in place in order to make sure that their wishes are met.

Couples who aren't married also do not have the right to speak for each other in the event of a medical crisis. If your life partner loses consciousness or becomes incapacitated, someone has to make a decision whether to go ahead with a medical procedure. That person should be you, but unless you have a health care directive such as a living will in place, you have no legal right to make decisions for your partner.

Tax and estate issues are also more complicated. In most cases, it makes more sense not to own property such as a car or electronics equipment together or to have a joint loan. Whereas marital assets can be divided equally by a judge, there is no legal recourse for unmarried couples in the event of a breakup. Another example is home ownership. If one partner is listed as the sole owner of a home that the couple lives in together and he or she dies, the surviving partner might be left homeless. This can be resolved by properly titling assets, in this case making sure the home is in joint tenancy with rights of survivorship.

Investment Options

What are the steps in the investment process?

The investment process is comprised of several steps that enable you to select a portfolio appropriate to your risk tolerance and desired return. The primary steps in this process are:

Determine your desired return and risk tolerance
Develop an asset allocation plan
Select diversified investments within each asset class
Monitor your investments

Q: How are risk and return related?
A: Risk and return are positively correlated. The higher the risk of an investment, the higher a return it must offer in order to compensate for the risk. Risks come in many forms such as the volatility of the market, inflation risk, interest rate risk, and business risk. You must determine the degree of risk that you are willing to tolerate. Your investment professional can assist you in this process.
Select the level of risk that permits you to sleep at night. If you have a long investment horizon, then focus on your desired return. Year to year fluctuations should not be a concern. Over the long term, stocks have generated annual returns of about 10 to 11 percent and have had the highest level of risk while long-term government bonds have had long-term returns of 5 to 6 percent and have had the lowest level of risk. The more risk you can tolerate or the higher your desired rate of return, the higher the portion of your portfolio invested in stocks should be.
Q: What is an asset allocation plan?
A: Asset allocation is the distribution of investments among asset classes. Asset classes include different types of stocks, bonds, and mutual funds. It is a significant factor in determining your investment return relative to risk. Proper asset allocation maximizes returns and minimizes risk. This is because different classes of assets react differently to economic upswings or downswings. Allocation differs from diversification in that it balances a portfolio among different classes of assets, for example, growth stocks, long bonds, and large-company stocks, while diversification focuses on variety within an asset class. Generally, allocation among six or seven asset classes is recommended.

Q: What is diversification?
A: Diversification is the selection of multiple investments within a portfolio. For example, investing in a portfolio of 30 stocks rather than in just a few. By maintaining a diversified, varied portfolio, you are minimizing risk. You're less likely to make that "big killing," but when individual investments take a nose-dive, you won't take a big hit.

Q: How can I best monitor my investments?
A: Examine carefully and promptly any written confirmations of trades that you receive from your broker, as well as all periodic account statements. Make sure that each trade was completed in accordance with your instructions. Check to see how much commission you were charged, to make sure it is in line with what you were led to believe you would pay. If commission rates have increased or will increase in the immediate future, or if charges such as custodial fees are to be imposed, then you should be informed in advance.

If securities are held for you in street name (where the customer's securities and assets are held under the name of the brokerage firm instead of the name of the individual who purchased the security or asset), you may request that dividends or interest payments be forwarded to you or put into an interest-bearing account, if available, as soon as they are received, rather than at the end of the month or after some other lengthy period of time.

Set up a file where you can store information relating to your investment activities, such as confirmation slips and monthly statements sent by your broker. Keep notes of any specific instructions given to your account executive or brokerage firm. Good records regarding your investments are important for tax purposes, and also in the event of a dispute about a specific transaction.

Periodically, ask yourself the following questions about your investment:
Is this investment performing as I was told it would?
How much money will I get if I sell it today?
How much am I paying in commissions or fees?
Have my investment goals changed? If so, is the investment still suitable?Have I decided what contingencies need to happen for me to sell the investment (i.e., a certain percentage decrease in value)?

What types of risks are involved in investing?

Nobody invests to lose money. However, investments always entail some degree of risk. Be aware that:

The higher the expected rate of return, the greater the risk. Depending on market developments, you could lose some or all of your initial investment or a greater amount.
Some investments cannot easily be sold or converted to cash. Check to see if there is any penalty or charge if you must sell an investment quickly or before its maturity date.
Investments in securities issued by a company with little or no operating history or published information may involve greater risk.
Securities investments, including mutual funds, are not federally insured against a loss in market value.
Securities you own may be subject to tender offers, mergers, reorganizations, or third party actions that can affect the value of your ownership interest. Pay careful attention to public announcements and information sent to you about such transactions. They involve complex investment decisions. Be sure you fully understand the terms of any offer to exchange or sell your shares before you act. In some cases, such as partial or two-tier tender offers, failure to act can have detrimental effects on your investment.
The past success of a particular investment is no guarantee of future performance.

What steps can I take to avoid unnecessary risks?

1. Never give in to high pressure. A high-pressure sales pitch can mean trouble. Be suspicious of anyone who tells you, "Invest quickly or you will miss out on a once in a lifetime opportunity."

2. Never send money to purchase an investment based simply on a telephone sales pitch.

3. Never make a check out to a sales representative.

4. Never send checks to an address different from the business address of the brokerage firm or a designated address listed in the prospectus.

If your broker asks you to do any of these things, contact the branch manager or compliance officer of the brokerage firm.

5. Never allow your transaction confirmations and account statements to be delivered or mailed to your sales representative as a substitute for receiving them yourself. These documents are your official record of the date, time, amount, and price of each security purchased or sold. Verify that the information in these statements is correct.

What questions should I ask before making any investment?

Have this list of questions with you the next time you talk to your broker. Write down the answers you get and the action you decide to take. Your notes may come in handy later if there is a dispute or a problem. A good broker will be happy to answer your questions and will be impressed with your seriousness and professionalism.

Is this investment registered with the SEC and a state securities agency?
Does the investment match my investment goals?
How will the investment make money for me (dividends, interest, capital gains)?
What set of circumstances have to occur for the value of the investment to go up? To go down? (e.g., must interest rates rise?)
What fees do I have to pay to buy, maintain, and sell the investment? After fees, how much does the value have to increase by before I make a profit?
How easy is it for me to unload this investment in a hurry, should I need the money?
What are the specific risks associated with this investment, for example what is the risk that rising interest rates will devalue your investment or the risk that an economic recession could decrease its value?
Is the company experienced at what it is doing? How long has it been in business? What is their track record? Who are their competitors?
Can I get more information: a prospectus, the latest SEC filings, or the latest annual report?

What questions should I ask before making a mutual fund investment?

Here is a list of potential questions to ask before making a mutual fund investment:

How has the fund performed over the long run? Where can I get an independent evaluation of it?
What specific risks are associated with it?
What type of securities does the fund hold?
How often does the portfolio change?
Does this fund invest in derivatives, or in any other type of investment that could cause rapid changes in the NAV (Net Asset Value)?
How does the fund's performance compare to other funds of its type, or to an index of similar investments?
How much of a fee will I have to pay to buy shares? To maintain shares?
How often will I get statements? Can you explain what the statement tells me about the investment?

What investment hazards should I look out for?

There are no magic formulas for successful investing. It takes a disciplined, reasoned approach, a commitment to follow some basic, solid rules that have proved effective over time, and to stay in it for the long haul.

Here are some specific tips.

Don't Let Greed Cloud Your Better Judgment. A disciplined approach, taking into account your investment objectives, will pay dividends in more ways than one. Investors who are constantly chasing the jackpot usually lose in the long run.

Don't Rely on Tips. The "hot tip" is the bane of investors. There may be short-term gain in some cases, but in this regard, it's generally wise to follow the maxim, "What goes up must come down."

Be Resolute. Develop a comprehensive, reasoned plan with your adviser, and stick to it, despite the temptation to "take a flyer." When you have developed your plan, and in the absence of other factors, follow it.

Consider All Your Needs and Get a Plan That Fits. For financial planning to be truly effective, all your needs must be considered: money management, tax planning, retirement planning, estate planning, insurance, etc.

Evaluate Investments Periodically. An investment program is not static and unchanging. Your financial situation and objectives may change, as does the economic situation. Review your plan with your adviser and, if necessary, update it to reflect your current and long-term needs.

Monitor your investments. Stay informed. Don't rely on others to "take care of" your portfolio. Keep up with your reading, whether in newsletters, magazines, or the internet.

Read Broker-Account Forms With Care. Many investors pay scant attention to the forms involved in opening and maintaining a brokerage account. As pointed out earlier, many investors are not aware that much of the paperwork is intended, at least in part, to protect the broker and the form against any complaints they might bring.

What should I invest my IRA in?

Like any other investment, you should match the portfolio with your desired return, risk tolerance and investment time horizon. The higher your desired return and risk tolerance and the longer your time horizon, the greater the portion of your portfolio should be in equity investments such as common stocks. Since IRAs are generally long-term investments, equity investments are generally appropriate for a portion of the account.

For those with a lower risk tolerance, short-term fixed income investment would be appropriate. Many people have their IRAs invested in CDs. This is appropriate only for those with a very short time horizon or very low-risk tolerance. IRA money, like any other investment, should be invested in something that will provide a decent return.

Municipal bonds should never be used within an IRA. In doing so, you sacrifice return and may convert otherwise tax-free income to taxable income when you withdraw the funds.

What are derivatives and options?

A derivative is an investment instrument whose value is based on underlying assets such as stocks, bonds, commodities, currencies, interest rates and market indexes. Options are one of the most common types of derivatives and are a useful tool for enhancing a portfolio's income and in many cases, reducing risk. Other types of derivatives include futures contracts, forward contracts, and swaps, but these are more appropriate for sophisticated investors.

Stock options are contracts that give the purchaser the right to buy or sell at a specific price and within a certain period of time, for instance, 100 shares of corporate stock (known as the underlying security). These options are traded on a number of stock exchanges and on the Chicago Board Options Exchange.

When investors buy an option contract, they pay a premium, typically the price of the option as well as a commission on the trade. If they buy a "call" option, they are speculating that the price of the underlying security will rise before the option period expires. If they buy a "put" option, they are speculating that the price will fall.

While options trading can be very useful as part of an overall investment strategy, it can also be very complicated and sometimes extremely risky. If you plan to trade in options, make sure that you understand basic options strategy and that your registered representative is qualified in this area.

How can I avoid the most frequent money-losing mistakes?

Here are the top mistakes that cause investors to lose money unnecessarily.

Using a cookie-cutter approach
Taking unnecessary risks
Allowing fees and commissions to eat up profits
Not starting early enough
Ignoring the costs of taxes
Letting emotion govern your investing

Q: Should I use a standard asset allocation formula such as those seen in many popular finance magazines?
A: Most investors are satisfied with a one-size-fits-all investment plan. However, your individual needs as an investor must govern any plans you make. For instance, how much of your investment can you risk losing? What is your investment timetable? (i.e., are you retired or a young professional?) The allocation of your portfolio's assets among various types of investments should match your particular needs.

Q: Can I make a decent return without taking unnecessary risks?
A: You do not have to risk your capital to make a decent return on your money. While all investments have some degree or risk, many investments that offer a return that beats inflation without unduly jeopardizing your hard-earned money. For instance, Treasuries are one of the safest possible investments and offer a decent return with very little risk.

Q: What is the downside of high fees and commissions?
A: Many investors allow brokers' commissions, fees, and other costs to cut into their returns. Be aware of the fees you are paying and make sure they are appropriate for the services you are receiving. The more you pay in fees the lower your net return will be.

Q: When should I start investing?
A: Today. Many investors are not cognizant of the power of interest compounding. By starting out early enough with your investment plan, you can invest less, and in the long run, still come out ahead of where you would be if you start later in life.

Q: What is the impact of taxes on my investment returns?
A: Net profits on your share of your mutual funds' stock sales are taxable to you as capital gains. Unless you are in a tax-deferred retirement account, the taxes will eat into your profits. The solution? Invest in funds where shares are bought and sold less frequently and have a low turnover rate (10 percent or less per year).

Q: Should I let my emotions affect my investments?
A: Never give in to pressure from a broker to invest in a "hot" security or to sell a fund and get into another one. The key to a successful portfolio lies in planning, discipline, and reason. Emotion and impulse have no role to play. Try to stay in a security or fund for the long haul. On the other hand, when it's time to unload a loser, then let go of it. Finally, do not fall prey to the myth of "market timing." This is the belief that by getting into or out of a security at exactly the right moment, we can retire rich. Market timing does not work.

Instead, use investment strategies that do work: a balanced allocation of your portfolio's assets among securities that suit your individual needs, the use of dollar-cost averaging and dividend-reinvestment programs, and a well-disciplined, long-haul approach to saving and investment.

What is the difference between my cumulative return and annualized return?

Suppose Mr. N. Vestor invests $100 in an investment that earns 10 percent this year and 10 percent the next year. What is his cumulative return? The answer is 21 percent.

Here's why. N. Vestor's 10 percent gain makes his $100 grow to $110. Next year, he earns another 10 percent, leaving him with $121. His investment has earned a cumulative 21 percent return over two years. His annualized return, however, is 10 percent.

The fact that the cumulative return of 21 percent is greater than twice the 10 percent annual return is due to the effect of compounding, which means that your yearly earnings are added to your original investment before the current year's earnings are applied.

What is the rule of 72?

The rule of 72 is a way of finding out long it will take for your investment to double. Divide an investment's annual return into 72, and you will have the number of years necessary to double your investment.

An investment's annual return is 10 percent. Ten percent divided into 72 is 7.2, so your investment will double in 7.2 year.

What is "Total Return" and why is it important?

If you reinvest all of your gains, including dividends and interest, you will be getting the most from compounding. The percentage you achieve is termed "total return." It includes appreciation, interest and dividends. It is particularly important in examining the past and current performance of mutual funds.

Mutual funds must, by law, distribute almost all of their capital gain and dividend income each year. Many investors reinvest these distributions, using them to buy more fund shares. Because the fund's share price is reduced after a fund makes a distribution, the long-term price trend of a fund's shares may not accurately reflect the fund's performance. However, the fund's total return, which takes into account reinvested dividends, is often a more accurate reflector of the fund's performance.

How does "yield" differ from "total return?"

Yield is the amount of dividends or interest paid annually by an investment. The yield is usually expressed as a percentage of the investment's current price. It does not consider appreciation.

Because certificates of deposit and money-market funds maintain the same value, their total return does not differ much from their yield. But because stocks and bonds fluctuate in price, there can be a large difference between yield and total return.

Can I measure my return as the increase in the value of my portfolio over a given period?

Investors often take the following shortcut, which often yields misleading results. Instead of looking at total return, they simply compare their year-end portfolio value with the value at the beginning of the year, and attribute the entire growth to investment gains.

The reason this shortcut may be misleading is that any additional investments or withdrawals made during the year are not taken into account.

Annuities

What are variable annuities?

Variable annuity contracts are sold by insurance companies. Purchasers pay a premium of, for example, $10,000 for a single payment variable annuity or $50 a month for a periodic payment variable annuity. The insurance company deposits these premiums in an account that is invested in a portfolio of securities. The value of the portfolio goes up or down as the prices of its securities rise or fall.

After a specified period of time, which often coincides with the year the purchaser turns age 65, the assets are converted into annuity payments. Although the insurance company guarantees a minimum payment, these payments are variable, since they depend on the periodic performance of the underlying securities.

Almost all variable annuity contracts carry sales charges, administrative charges, and asset charges. The amounts differ from one contract to another and from one insurance company to another.

Fixed annuity contracts are not considered securities and are not regulated by the SEC (Securities and Exchange Commission).

How do annuities work?

An annuity, in essence, is insurance against "living too long." In contrast, traditional life insurance guards against "dying too soon." Briefly, here is how annuities function: An investor hands over funds to an insurance company. The insurer invests the funds. At the end of the annuity's term, the insurer pays the investor his or her investment plus the earnings. The amount paid at maturity may be a lump sum or an annuity, which is a set of periodic payments that are guaranteed as to amount and payment period.

Earnings that occur during the term of the annuity are tax-deferred and an investor is not taxed until the amounts are paid out. Because of the tax deferral, your funds have the chance to grow more quickly than they would in a taxable investment.

Should I invest in annuities?

There are two reasons to use an annuity as an investment vehicle:

You want to save money for a long-range goal, and/or
You want a guaranteed stream of income for a certain period of time.

Annuities lend themselves well to funding retirement, and, in certain cases, education costs.

One negative aspect of an annuity is that you cannot get to your money during the growth period without incurring taxes and penalties. The tax code imposes a 10 percent premature withdrawal penalty on money taken out of a tax-deferred annuity before age 59-1/2, and insurers impose penalties on withdrawals made before the term of the annuity is up. The insurers' penalties are termed "surrender charges," and they usually apply for the first seven years of the annuity contract.

These penalties lead to a de facto restriction on the use of annuities as an investment. It really only makes sense to put your money in an annuity if you can leave it there for at least ten years, and only when the withdrawals are scheduled to occur after age 59-1/2. This is why annuities work well mostly for retirement needs, or for education funding in cases where the depositor will be at least 59-1/2 when withdrawals begin.

Annuities can also be effective in funding education costs where the annuity is held in the child's name under the provisions of the Uniform Gifts to Minors Act. The child would then pay tax on the earnings when the time came for withdrawals. A major drawback to this planning technique is that the child is free to use the money for any purpose, not just education costs.

If an investment adviser recommends a tax-deferred variable annuity, should you invest it? Or would a regular taxable investment be better?

Generally, you should be aware that tax-deferred annuities very often yield less than regular investments. They have higher expenses than regular investments, and these expenses eat into your returns. On the plus side, the annuity provides a death benefit. You should also be aware that there may be a commission on the product an investment adviser may be entitled to a commission on the product he or she is recommending.

Should a retiree purchase an immediate annuity?

At first glance, the immediate annuity would seem to make sense for retirees with lump-sum distributions from retirement plans. After all, an initial lump-sum premium can be converted into a series of monthly, quarterly or yearly payments, representing a portion of principal plus interest, and guaranteed to last for life. The portion of the periodic payout that is a return of principal is excluded from taxable income.

However, there are risks. For one thing, when you lock yourself into a lifetime of level payments, you aren't guarding against inflation. You are also gambling that you will live long enough to get your money back. Thus, if you buy a $150,000 annuity and die after collecting only $60,000, the insurer often gets to keep the rest. Unlike other investments, the balance doesn't go to your heirs. Furthermore, since the interest rate is fixed by the insurer when you buy it, you are locking into today's low rates.

You can hedge your bets by opting for what's called a "certain period," which, in the event of your death, guarantees payment for some years to your beneficiaries. There are also "joint-and-survivor" options, which pay your spouse for the remainder of his or her life after you die, or a "refund" feature, in which a portion of the remaining principal is resumed to your beneficiaries.

Some plans offer quasi-inflation adjusted payments. One company offers a guaranteed increase in payments of 10 percent at three-year intervals for the first 15 years. Payments are then subject to an annual cost-of-living adjustment, with a 3 percent maximum. However, for these enhancements to apply, you will have to settle for much lower monthly payments than the simple version.

A few companies have introduced immediate annuities that offer potentially higher returns in return for some market risk. These "variable, immediate annuities" convert an initial premium into a lifetime income; however, they tie the monthly payments to the returns on a basket of mutual funds.

If you want a comfortable retirement income, your best bet is a balanced portfolio of mutual funds. If you want to guarantee that you will not outlive your money, you can plan your withdrawals over a longer time horizon.

How do life annuities differ from life insurance?

While traditional life insurance guards against "dying too soon," an annuity, in essence, can be used as insurance against "living too long." With an annuity, you will receive in return a series of periodic payments that are guaranteed as to amount and payment period. Thus, if you choose to take the annuity payments over your lifetime (there are many other options), you will have a guaranteed source of "income" until your death.

If you "die too soon" (that is, you don't outlive your life expectancy), you will get back from the insurer far less than you paid in. On the other hand, if you "live too long" and outlive your life expectancy you may get back far more than the cost of your annuity--along with the resultant earnings. By comparison, if you put your funds into a traditional investment, you may run out of funds before your death.

What's the down side to buying an annuity?

You cannot get to your money during the growth period without incurring taxes and penalties. The tax code imposes a 10 percent premature-withdrawal penalty on money taken out of a tax-deferred annuity before age 59-1/2 and insurers impose penalties on withdrawals made before the term of the annuity is up. The insurers' penalties are termed "surrender charges," and they usually apply for the first seven years of the annuity contract.

What types of annuities are available?

You can purchase a single-premium annuity, in which the investment is made all at once (perhaps using a lump sum from a retirement plan payout).

With the flexible-premium annuity, the annuity is funded with a series of payments. The first payment can be quite small.

The immediate annuity starts payments right after the annuity is funded. It is usually funded with a single premium, and is usually purchased by retirees with funds they have accumulated for retirement.

With a deferred annuity, payouts begin many years after the annuity contract is issued. Deferred annuities are used as long-term investment vehicles by retirees and non-retirees alike. They are used in tax-deferred retirement plans and as individual tax-sheltered annuity investments, and may be funded with a single or flexible premium.

With a fixed annuity contract, the insurance company puts your funds into conservative, fixed income investments such as bonds. Your principal is guaranteed, and the insurance company gives you an interest rate that is guaranteed for a certain minimum period--from a month to a year, or more. A fixed annuity contract is similar to a CD or a money market fund, depending on length of the period during which interest is guaranteed, and is considered a low risk investment vehicle.

This guaranteed interest rate is adjusted upwards or downwards at the end of the guarantee period.

All fixed annuities also guarantee you a certain minimum rate of interest of 3 to 5 percent for the entirety of the contract.

The fixed annuity is a good annuity choice for investors with a low risk tolerance and a short-term investing time horizon. The growth that will occur will be relatively low. In times of falling interest rates, fixed annuity investors benefit, while in times of rising interest rates they do not.

The variable annuity, which is considered to carry with it higher risks than the fixed annuity (about the same risk level as a mutual fund investment) gives you the ability to choose how to allocate your money among several different managed funds. There are usually three types of funds: stocks, bonds, and cash-equivalents. Unlike the fixed annuity, there are no guarantees of principal or interest. However, the variable annuity does benefit from tax deferral on the earnings.

You can switch your allocations from time to time for a small fee or sometimes for free.

The variable annuity is a good annuity choice for investors with a moderate to high risk tolerance and a long-term investing time horizon.

Today, insurers make available annuities that combine both fixed and variable features.

What are my options for collecting my annuity?

When it's time to begin taking withdrawals from your deferred annuity, you have several choices. Most people choose a monthly annuity-type payment, although a lump sum withdrawal is also possible. The size of your monthly payment depends on several factors including:

The size of the amount in your annuity contract
Whether there are minimum required payments
The annuitant's life expectancy
Whether payments continue after the annuitant's death
Summaries of the most common forms of payment (settlement options) are listed below. Keep in mind that once you have chosen a payment option, you cannot change your mind.

Fixed Amount gives you a fixed monthly amount (chosen by you) that continues until your annuity is used up. The risk of using this option is that you may live longer than your money lasts. If you die before your annuity is exhausted, your beneficiary gets the rest.

Fixed Period pays you a fixed amount over the time period you choose. For example, you might choose to have the annuity paid out over ten years. If you are seeking retirement income before some other benefits start, this may be a good option. If you die before the period is up, your beneficiary gets the remaining amount.

Lifetime or Straight Life payments continue until you die. There are no payments to survivors. The life annuity gives you the highest monthly benefit of the options listed here. The risk is that you will die early, thus leaving the insurance company with some of your funds.

Life with Period Certain gives you payments as long as you live (as does the life annuity) but with a minimum period during which you or your beneficiary will receive payments, even if you die earlier than expected. The longer the guarantee period is, the lower the monthly benefit will be.

Installment-Refund pays you as long as you live and guarantees that, should you die early, whatever is left of your original investment will be paid to a beneficiary.

Joint and Survivor. In one joint and survivor option, monthly payments are made during the annuitants' joint lives, with the same or a lesser amount paid to whoever is the survivor. In the option typically used for retired employees, monthly payments are made to the retired employee, with the same or a lesser amount to the employee's surviving spouse or other beneficiary. In this case, the spouse's (or other co-annuitant's) death before the employee won't affect what the survivor employee collects. The amount of the monthly payments depends on the annuitants' ages and whether the survivor's payment is to be 100 percent of the joint amount or some lesser percentage.

What's the tax on payouts from a qualified plan or IRA annuity?

A tax-qualified annuity is one used to fund a qualified retirement plan, such as an IRA, Keogh plan, 401(k) plan, SEP (Simplified Employee Pension), or some other retirement plan.

Any nondeductible or after-tax amount you put into the plan is not subject to income tax when withdrawn
The earnings on your investment are not taxed until withdrawal.

If you withdraw money before the age of 59 1/2, you may have to pay a 10 percent penalty on the amount withdrawn in addition to the regular income tax. One of the exceptions to the 10 percent penalty is for taking the annuity out in equal periodic payments over the rest of your life.

Once you reach the age after which retirement plan required minimum distributions (RMDs) must begin (age 73 for 2024 through 2032), you will have to start taking withdrawals in certain minimum amounts specified by the tax law (with exceptions for Roth accounts and certain other retirement accounts of employees still working).

Is it a good idea to buy annuities for my IRA or qualified plan?

Though this is sometimes done, no tax advantage is gained by putting annuities in such a plan since qualified plans and IRAs as well as annuities are tax-deferred. It might be better, depending on your situation, to put other investments such as mutual funds in IRAs and qualified retirement plans, and hold annuities in your individual account.

How will my annuity payouts be taxed?

Payouts are taxed differently for qualified and non-qualified plans. These differences are summarized below.
Qualified and Non-Qualified Annuities
A tax-qualified annuity is one used to fund a qualified retirement plan, such as an IRA, Keogh plan, 401(k) plan, SEP (Simplified Employee Pension), or some other retirement plan. The tax-qualified annuity, when used as a retirement savings vehicle, is entitled to all of the tax benefits-and penalties--that Congress saw fit to attach to such plans.

The tax benefits are:

The amount you put into the plan is not subject to income tax, and/or

The earnings on your investment are not taxed until withdrawal.

A non-qualified annuity, on the other hand, is purchased with after-tax dollars. You still get the benefit of tax deferral on the earnings.

Tax Rules for Qualified Annuities
When you withdraw money from a qualified plan annuity that was funded with pre-tax dollars, you must pay income tax on the entire amount withdrawn.

Once you reach the age after which retirement plan required minimum distributions (RMDs) must begin (age 73 for 2024 through 2032), you will have to start taking withdrawals, in certain minimum amounts specified by the tax law.

Tax Rules for Non-Qualified Annuities
With a non-qualified plan annuity that was funded with after-tax dollars, you pay tax only on the part of the withdrawal that represents earnings on your original investment.

If you make a withdrawal before the age of 59-1/2, you will pay the 10 percent penalty only on the portion of the withdrawal that represents earnings.

With a non-qualified annuity, you are not subject to RMDs after age 73.

What tax must my beneficiaries or heirs pay if my annuity continues after my death?

Taxes may apply to your beneficiary (the person you designate to take further payments) or your heirs (your estate or those who take through the estate if you didn't designate a beneficiary).

Income tax. Annuity payments collected by your beneficiaries or heirs are subject to tax on the same principles that would apply to payments collected by you.

Exception: There's no 10 percent penalty on withdrawal under age 59-1/2 regardless of the recipient's age, or your age at death.

Estate Tax. The present value at your death of the remaining annuity payments is an asset of your estate and subject to estate tax with other estate assets. Annuities passing to your surviving spouse or to charity would escape this tax.

How should I shop for an annuity?

Check Out The Insurer. Make sure that the insurance company offering it is financially sound. Annuity investments are not federally guaranteed, so the soundness of the insurance company is the only assurance you can rely on. Several services rate insurance companies.

Compare Contracts. For immediate annuities: Compare the settlement options. For each $1,000 invested, how much of a monthly payout will you get? Consider the interest rate and any penalties and charges.

Deferred annuities. Compare the rate, the length of guarantee period, and a five-year history of rates paid on the contract, not just the interest rates.

Variable annuities. Check out the past performance of the funds involved.

If a particular fund has a great track record, ascertain whether the same management is still in place. Although past performance is no guarantee, consistent management will grant you better odds.

What are the added or hidden costs in buying an annuity?

There are costs associated with annuities. Here are the most important items you should be aware of:

Sales Commission. Ask for details on any commissions you will be paying. What percentage is the commission? Is the commission deducted as a front-end load? If so, your investment is directly reduced by the amount of the commission. A no-load annuity contract, or at least a low-load contract, is the best choice.

Surrender Penalties. Find out the surrender charges (that is, the amounts charged for early withdrawals). The typical charge is 7 percent for first-year withdrawals, 6 percent for the second year, and so on, with no charges after the seventh year.

Be sure the surrender charge "clock" starts running with the date your contract begins, not with each new investment.

Other Fees and Costs. Ask about all other fees. With variable annuities, the fees must be disclosed in the prospectus. Fees lower your return, so it is important to know about them. Fees might include:

Mortality fees of 1 to 1.35 percent of your account (protection for the insurer in case you live a long time)
Maintenance fees of $20 to $30 per year
Investment advisory fees of 0.3 percent to 1 percent of the assets in the annuity's portfolios

Other Considerations. Some annuity contracts offer "bail-out" provisions that allow you to cash in the annuity if interest rates fall below a stated amount without paying surrender charges.

There may also be a "persistency" bonus which rewards annuitants who keep their annuities for a certain minimum length of time.

Is it better to take an annuity or a lump-sum distribution?

As in so many areas of retirement planning, that depends upon your particular needs and circumstances.

An annuity preserves the tax shelter for funds not yet paid out as annuity income, continuing to grow tax-free to fund future payouts.
A lump sum withdrawal may be preferable for those in questionable health.
Consider an annuity with a "refund feature" that guarantees a fixed sum to your heirs should you die earlier than expected.

What is a joint and survivor annuity?

A joint and survivor annuity pays a certain annuity during your life and half that amount (it could be more) to your surviving spouse for life.

In almost all cases, the annual amount you will get under a joint and survivor annuity will be less than you would get under an annuity on your life alone.

Can I change from a joint and survivor annuity if it doesn't meet my needs?

Joint and survivor annuities are almost always required in pension plans, and sometimes in other plans. But you and your spouse can still agree to some other form.

Chief reasons for such agreement are so that your child or other family member can share in the income, or to take a lump sum distribution, or to take a larger annual amount over the participant's life alone.

Bonds

What is a bond?

A bond is a certificate promising to repay, no later than a specified date, a sum of money that an investor or bondholder has loaned to a company. In return for the use of the money, the company (or municipality or other government entity) also agrees to pay bondholders a certain amount of interest (referred to as a coupon) each year, and is typically a percentage of the amount loaned.

Bondholders are not owners of the company. They do not share in dividend payments or vote on company matters and the return on their investment does not usually depend on how successful the company is. Bondholders are entitled to receive the amount of interest originally agreed upon, as well as a return of the principal amount of the bond, provided they hold the bond for the time period specified. For example, if you buy a bond with a face value of $1000 and a coupon of 8 percent with a 10-year maturity rate, you'll receive $80 in interest every year, and at the end of the 10 years, you'll get your $1,000 back.

What are the various types of bonds?

Bonds are categorized by the entities that issue them such as corporate, US Treasury, GSE (Government Sponsored Enterprises) debt securities, and municipal bonds. Corporate bonds generally are issued in denominations of $1,000 or sometimes, $5,000. Treasury bonds are issued denominations of $1,000 while municipal bonds are issued in denominations of $5,000. These numbers refer to the face value of the bond and is the amount that the company agrees to repay to the bondholder when the bond matures.

The prices at which these bonds trade may differ from their face values because the price or value of a bond is closely related to the movement of interest rates in the economy. As interest rates change, so too will the value of the bond. If you need to sell the bond before it matures, it may be worth more (or less) than the price you originally paid for it.

Some bonds are callable or redeemable, which means that the issuer can elect to buy them back from holders at the face amount before the date of maturity, often referred to as the call date. The price of a callable bond is always lower than the price of a regular bond and the yield is typically higher.

How are bonds classified?

Bonds are classified in three ways: by the issuing organization, by their maturity, and by their quality.

Issuing Organization

The U.S. government sells bonds through the Treasury to finance the national debt and through various federal agencies for special purposes. State and local municipalities sell bonds to finance schools, hospitals, highways, bridges, airports, and the like, and corporations sell bonds to finance long-term capital project such as new plants or equipment.

Maturity

Maturity means the length of time until the principal is repaid.

Short-term bonds mature in less than two years, but in some cases may also refer to bonds that mature in less than one year
Long-term bonds mature in more than ten years
Intermediate-term bonds, as the name implies, mature between short and long term debt

Treasury bills have maturity dates of one year or less, Treasury notes mature between one and ten years, and Treasury bonds have maturates of ten years or longer.

As a general rule, the longer the bond's maturity, the greater the interest-rate risk.

What is meant by the term "bond quality?"

Bond quality refers to the creditworthiness of the issuing organization; in other words, the likelihood that it will be able to repay its debt. Independent rating services, such as Moody's Investors Service, Inc. or Standard & Poor's, publish directories that rate bond quality. A lower rating means the service associates a greater credit risk with that particular bond issue. Rating agencies use a combination of letters A through D to estimate the risk for prospective investors. For example, AAA (or Aaa) is the highest quality bond while C or D rated bonds are in default of payment.

The ratings are not meant to measure the attractiveness of the bond as an investment, but rather the risk. That is, how likely the principal will be paid if held to maturity.

Only the U.S. Treasury's debt is considered free of credit risk.

What is a "bond call provision?"

Investors considering long-term bonds should be alert to the possibility of a "call" or redemption feature in bonds, which can frustrate expectations of a high yield over the life of the bonds. Such a call feature gives the issuing corporation the right to call in or redeem its bonds after a specified number of years have elapsed. Growing numbers of corporations are reserving such early redemption features in their bonds in hopes of refinancing later at the lower interest rates. The call feature has three effects:

After the call date there's no guarantee that high yields will continue
It may limit the appreciation of the bonds
It creates the risk that, where the purchase price is higher than the redemption price, part of the investment will be lost

There are a number of different call provisions, some of which are complex and hard to understand, but brokers are required to disclose call features in writing. Check the indenture, which is the contract between the bond issuer and bondholder, and seek out bonds that either have no call feature or have call protection or choose bonds that have the latest possible redemption date.

What is a bond rating?

The table to the right provides a summary of the ratings:

For more detailed definitions of each rating, consult the publications of the rating services.

What factors affect bond prices?

Think of bond prices and interest rates as opposite ends of a see-saw. When rates fall, prices rise. When rates rise, prices fall. Why does it work this way?

You buy a bond worth $10,000, which pays 9 percent interest until maturity in 30 years. Suppose you need to sell that bond after only 10 years, at which time, the interest rates on new loans is 11 percent. Why should investors buy your bond paying only 9 percent when they can get 11 percent elsewhere?

To sell it, you'll need to drop the price of the bond below the price you paid for it. Then, when the bond matures, your buyer will get more than he or she paid for it, making up for the lower-than-market interest payments received meanwhile.

On the other hand, if you needed to sell the bond when the prevailing interest rates on new loans was at 7 percent, you could charge a premium price for your bond that pays a more favorable 9 percent rate. Your buyer will receive less than he or she paid for it when the bond matures, making up for the higher-than-marketplace interest payments received in the interim.

Bond prices are also influenced by maturity. The extent of the change in bond price is also influenced by the maturity of the bond. The longer the maturity is, the greater the change in price for a given change in interest rates. For example, a rise in interest rates will bring about a larger drop in price for a 20-year bond than for an otherwise equivalent 10-year bond.

Bond mutual fund share values generally reflect bond prices. Fund managers decide which bonds to buy and sell, and when, in accordance with the fund's investment objective. And, of course, shares in a bond mutual fund can be redeemed or liquidated at any time.

Bond fund managers try to lengthen or shorten the fund's average maturity (within the fund's overall investment objectives) to anticipate changing interest rates.

Changes in bond mutual fund prices due to changing interest rates do not reflect on the creditworthiness of the bond issuers. If, however, their creditworthiness changes, bond mutual fund prices may also change. This type of price volatility is known as credit risk.

This is one good reason to invest in bond funds. Because a fund consists of a pool of bonds from an array of organizations, the effect of one default on the share price of the entire fund is not nearly as great as it would be for an investor who held only that single bond.

Should I buy individual bonds directly or through a mutual fund?

The biggest difference between an individual bond and a bond mutual fund is that with individual bonds you can "lock in" the rate, but with a bond mutual fund because the bond fund contains many different bonds, neither the dividend payments you receive nor the maturity date is fixed. So you can't lock in the principal or your payment rate.

Let's examine the implications of this difference.

A bond mutual fund is issued by an investment company of which the sole business is managing a portfolio of individual bonds. Investors purchase ownership shares in the fund, with each share representing ownership in all the bonds in the fund's portfolio. Thus, a pool of shareholders owns a pool of bonds. Professional money managers use shareholders' investments to buy and sell bonds for the portfolio in accordance with the fund's investment objective.

Due to pooled resources and the professional money management, bond fund shareholders can invest in far more bonds than the average individual investor could. For example, you would need to pay $25,000 for a single Government National Mortgage Association (GNMA or Ginnie Mae) bond, but you can invest in most GNMA bond mutual funds for only $1,000.

Liquidity is another important difference between an individual bond and a bond fund. By law, the bond fund must buy back your shares at any time. You may receive more or less than your purchase price, depending on how the value of the fund's underlying portfolio has changed.

In contrast, for an individual bond, if you invested in it directly, you would need to find your own buyer if you wanted to sell the bond before it matured.

Bond fund portfolios can contain many different types of bonds of different maturates and varying quality. Risks also vary depending on the type of fund. All bond funds are subject to interest rate risk and most are subject to credit risk. There may be other types of risk as well. Each fund's investment objective, the types of bonds it invests in, related risks, fees, and other information can be found in the fund's prospectus.

What types of bond funds are there?

The table to the right shows eight common types of bond funds and some of their key characteristics.

What are municipal bonds?

Bonds issued by states, cities, or certain agencies of local governments (such as school districts) are called municipal bonds. An important feature of these bonds is that the interest a bondholder receives is not subject to federal income tax. In addition, the interest is also exempt from state and local tax if the bondholder lives in the jurisdiction of the issuing authority. Because of the tax advantages, however, the interest rate paid on municipal bonds is generally lower than that paid on corporate bonds.

Rating agencies evaluate bonds issued by state and local governments and their agencies and take into consideration such factors as the tax base, population statistics, total debt outstanding, and the area's general economic climate.

There are different types of municipal bonds. Some are general obligation bonds secured by the full faith and credit of a state or local government and backed by its taxing power. Others are revenue bonds that are issued to finance specified public works (such as bridges or tunnels) and are directly backed by the income from the specific project.

Prices of most municipal bonds are not usually quoted in daily newspapers.

If you are interested in a particular bond issue, consult bond dealers for their current prices. Your public library may also have copies of a municipal bond guide or a "Blue List."

What do I need to know about U.S. Government bonds?

Like state and local governments, the U.S. Government also issues debt securities to raise funds. Because these are backed by the federal government itself, they are considered to be very low risk.

Government debt securities include Treasury bills with maturates of up to one year, Treasury notes with that mature between one and ten years, and Treasury bonds with maturates between ten and thirty years.

Other U.S. Government agencies issue bonds, notes, debentures, and participation certificates as well.

While government securities do not have to be registered with the SEC, transactions involving them are subject to the anti-fraud provisions of the securities laws and SEC rules.

Can I buy treasury bonds without a broker?

Treasury bills, notes, and bonds can be purchased directly from the Federal Reserve. Call the Federal Reserve branch nearest you and ask them to mail you information on purchasing through the Treasury Direct program.

Mutual Funds

How are mutual fund distributions taxed?

You must generally report as income any mutual fund distribution, whether or not it is reinvested. The tax law generally treats mutual fund shareholders as if they directly owned a proportionate share of the fund's portfolio of securities. The fund itself is not taxed on its income if certain tests are met and substantially all of its income is distributed to its shareholders. Thus, all dividends and interest from securities in the portfolio, as well as any capital gains from the sales of securities, are taxed to the shareholders.

There are two types of taxable distributions: ordinary dividends and capital gain distributions.

Ordinary dividends are the most common type of distribution from a corporation and are paid out of the earnings and profits of the corporation. For mutual funds, this is the interest and dividends earned by securities held in the fund's portfolio that represent the net earnings of the fund. Ordinary dividends are periodically paid out to shareholders and are taxable as ordinary income unless they are qualified dividends. Qualified dividends are ordinary dividends that meet the requirements to be taxed as net capital gains and are included with your capital gain distributions as long-term capital gain, regardless of how long you have owned your fund shares.

Like the return on any other investment, mutual fund dividend payments decline or rise from year to year, depending on the income earned by the fund in accordance with its investment policy. You should receive a Form 1099-DIV, Dividends and Distributions, from each payer for distributions of $10.00 or more; however, even if you do not receive a Form 1099-DIV or Schedule K-1 (dividends received through a partnership, an estate, a trust, or a subchapter S corporation), you must still report all taxable dividends.

Ordinary dividends are taxed at ordinary tax rates for whatever tax bracket you fall under. Qualified dividends are taxed at a 15 percent rate.

Capital gain distributions are the net gains, if any, from the sale of securities in the fund's portfolio. When gains from the fund's sales of securities exceed losses, they are distributed to shareholders. As with ordinary dividends, capital gain distributions vary in amount from year to year and are reported on Form 1099-DIV, Dividends and Distributions. Capital gain distributions are always reported as long-term capital gains for tax purposes.

Are reinvested dividends from a mutual fund taxable?

Most mutual funds offer you the option of having dividend and capital gain distributions automatically reinvested in the fund a--good way to buy new shares and expand your holdings. Most shareholders take advantage of this service, but you should be aware that you do not avoid paying tax by doing this. Reinvested ordinary dividends are taxed as ordinary income, just as if you had received them in cash and reinvested capital gain distributions are taxed as long-term capital gain.

If you reinvest, add the amount reinvested to the "cost basis" of your account. "Cost basis" is the amount you paid for your shares. The cost basis of your new shares purchased through automatic reinvesting is easily seen from your fund account statements. This information is important later on when you sell shares.

Make sure that you don't pay any unnecessary capital gain taxes on the sale of mutual fund shares because you forgot about reinvested amounts. When you reinvest dividends and capital gain distributions to buy more shares, you should add the cost of those shares (that is, the amount invested) to the cost basis of the shares in that account because you have already paid tax on those shares.

You bought 500 shares in Fund PQR in 1990 for $10,000. Over the years you reinvested dividends and capital gain distributions in the amount of $10,000, for which you received 100 additional shares. This year, you sold all 600 of those shares for $40,000.

If you forget to include the price paid for your 100 shares purchased through reinvestment (even though the fund sent you a statement recording the shares you received in each transaction), you will unwittingly report on this year's tax return a capital gain of $30,000 ($40,000 - $ 10,000) on your redemption of 600 shares, rather than the correct capital gain of $20,000 ($40,000 [$10,000 + $10,000]).

Failure to include reinvested dividends and capital gain distributions in your cost basis is a costly mistake.

Am I subject to tax if I switch from one fund to another in the same mutual fund family?

The "exchange privilege," or the ability to exchange shares of one fund for shares of another, is a popular feature of many mutual fund "families." Families are fund organizations offering a variety of funds.

For tax purposes, exchanges are treated as if you had sold your shares in one fund and used the cash to purchase shares in another fund. This means you must report any capital gain from the exchange on your return. The same tax rules used for calculating gains and losses when you redeem shares apply when you exchange them.

Gains on these redemptions and exchanges are taxable whether the fund invests in taxable or tax-exempt securities.

Am I subject to tax on return-of-capital distributions?

Sometimes mutual funds make distributions to shareholders that are not attributable to the fund's earnings. These are called nontaxable distributions, also known as returns of capital. Note that nontaxable distributions are not the same as the tax-exempt dividends. Because a return of capital is a return of part of your investment, it is not taxable. Your mutual fund will show any return of capital on Form 1099-DIV in the box for nontaxable distributions.

If you receive a return of capital distribution, your basis in the shares is reduced by the amount of the return.

Two years ago you purchased 100 shares of Fund ABC at $10 a share. Last year, you received a $1-per-share return of capital distribution, which reduced your basis in those shares by $1, to give you an adjusted basis of $9 per share. This year, you sell your 100 shares for $15 a share. Assuming no other transactions during this period, you would have a capital gain this year of $6 a share ($15 - $9) for a total reported capital gain of $600.

Non-taxable distributions cannot reduce your basis below zero. If you receive returns of capital that, taken together, exceed your original basis, you must report the excess as a long-term capital gain.

Should I invest in tax-exempt funds to cut my income taxes?

If you're in the higher tax brackets and are seeing your investment profits taxed away, you might want to consider tax-exempt mutual funds as an alternative.

The distributions of municipal bond funds that are attributable to interest from state and municipal bonds are exempt from federal income tax, although they may be subject to state tax.

The same is true of distributions from tax-exempt money market funds. These funds also invest in municipal bonds, but only in those that are short-term or close to maturity, the aim being to reduce the fluctuation in NAV that occurs in long-term funds.

Many taxpayers can ease their tax bite by investing in municipal bond funds. The catch with municipal bond funds is that they offer lower yields than comparable taxable bonds. For example, if a U.S. Treasury bond yields 4.8 percent, then a quality municipal bonds of the same maturity might yield 4 percent. The tax advantage makes it worthwhile to invest in the lower-yielding tax-exempt fund, and the tax advantage to a particular investor hinges on that investor's tax bracket.

To figure out how much you'd have to earn on a taxable investment to equal the yield on a tax-exempt investment, use this formula:

The tax-exempt yield divided by (1 minus your tax bracket) = equivalent yield of a taxable investment.

You are in the 24 percent bracket, and the yield of a tax-exempt investment is 4 percent. Applying the formula, we get 0.04 divided by (1.00 minus 0.24) = 0.0526. Therefore, 5.26 percent is the yield you would have to receive from a taxable investment to match the tax-exempt yield of 4 percent.

For some taxpayers, portions of income earned by tax-exempt funds may be subject to the federal alternative minimum tax.

Although income from tax-exempt funds is federally tax-exempt, you must still report on your tax return the amount of tax-exempt income you received during the year. This is an information-reporting requirement only and does not convert tax-exempt earnings into taxable income.

Your tax-exempt mutual fund will send you a statement summarizing its distributions for the past year and explaining how to handle tax-exempt dividends on a state-by-state basis.

Capital gain distributions paid by municipal bond funds (unlike distributions of interest) are not free from federal tax. Most states also tax these capital gain distributions.

How do states generally tax mutual fund distributions?

Generally, states treat mutual fund distributions as taxable income, just as the federal government does. However, states may not provide favored tax rates for dividends or long-term capital gains. Further, if your mutual fund invests in U.S. government obligations, states generally exempt dividends attributable to federal obligation interest from state taxation.

Mutual funds that invest in state obligations are another special situation. Most states do not tax income from their own obligations, whether held directly or through mutual funds. On the other hand, the majority of states do tax income from the obligations of other states. Thus, in most states, you will not pay state tax to the extent you receive, through the fund, income from obligations issued by your state or its municipalities.

What are the tax benefits and drawbacks of investing in a foreign mutual fund?

Dividends from funds investing in foreign stocks may qualify for the 15/5/0 percent rate on dividends. If your fund invests in foreign stocks or bonds, part of the income it distributes may have been subject to foreign tax withholding. If so, you may be entitled to a tax deduction or credit for your prorata share of taxes paid. Your fund will provide you with the necessary information.

A tax credit provides a dollar-for-dollar offset against your tax bill while a deduction reduces the amount of income on which you must pay tax, so it is generally advantageous to claim the foreign tax credit. If you decide to take the credit, you may need to attach a special form to your Form 1040, depending on the amount of credit involved.

Stocks

How are Stocks Traded?

Generally, stocks are traded in blocks or multiples of 100 shares, which are called round lots. An amount of stock consisting of fewer than 100 shares is said to be an odd lot.

On an exchange, an order that involves both a round lot and an odd lot-say 175 shares will be treated as two different trades and may be executed at different prices.

In the financial world, a trade is jargon for buy and sell. Your broker will charge you a different commission on each trade, and will confirm each of them separately.

These distinctions do not generally apply to trades executed in the OTC (Over-the-Counter) market. OTC stocks are not traded on a formal exchange such as New York Stock Exchange (NYSE) or the American Stock Exchange (AMEX).

What are the Differences between Stock Exchange Trades and Over-the-Counter Trades?

To be traded on an exchange such as the NYSE or AMEX, the issuing company must meet the exchange's listing standards; these may include requirements on the company's assets, number of shares publicly held, and number of stockholders. Organized markets for other instruments, including standardized options, impose similar restrictions.

The National Association of Securities Dealers' Automated Quotation System (NASDAQ), operated by the Financial Industry Regulatory Authority (FINRA), is considered a stock exchange. Like the exchanges, NASDAQ has certain listing standards which must be met for securities to be traded in that market.

Many securities are not traded on an exchange because the issuing companies are too small to meet exchange requirements. Instead, they are traded Over-the-Counter or OTC by broker-dealers negotiating directly with each other via computer and phone.

Investors who buy or sell securities on an exchange or over the counter usually will do so with the aid of a broker-dealer firm. The registered representative is the link between the investor and the traders and dealers who actually buy and sell securities on the floor of the exchange or elsewhere.

Market prices for stocks traded over the counter and for those traded on exchanges are established in somewhat different ways. The exchanges centralize trading in each security at one location the floor of the exchange. There, auction principles of trading establish the market price of a security according to the current buying and selling interests. If such interests do not balance, designated floor members known as specialists are expected to step in to buy or sell for their own account, to a reasonable degree, as necessary to maintain an orderly market.

Are My Mutual Fund Investments Protected by Insurance?

There are no guarantees for investors. No matter how you buy a fund through a brokerage firm, a bank, an insurance agency, a financial planning firm, or directly through the mail, bond funds, unlike bank deposits, are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Nor are they guaranteed by the bank or other financial institution through which you make your investment. Mutual funds involve investment risk, including the possible loss of principal. Conversely, investment risk always includes the potential for greater reward.

Even though mutual funds are not insured, there are some protections. Mutual funds are highly regulated by both the federal government primarily through the Securities and Exchange Commission and each of the state governments.

For example, all funds must meet certain operating standards, observe strict anti-fraud rules, and disclose specific information to potential investors. After you invest, funds must provide you with reports at least twice a year that describe how the fund fared during the period covered.

How are Securities Held?

Today, debt securities are held in electronic book-entry form, but in the past were issued as paper certificates. Ownership is transferred via computer rather than via actual transfer of paper certificates, reducing the possibility of loss, theft, or mutilation of the certificates.

There are still, however, many securities that are in certificate form. For example, you may have inherited stock certificates in paper form from a grandparent or other older relatives. Certificates representing your ownership of stocks or bonds are valuable documents and should be kept in a safe place. If a certificate is lost or destroyed, it may prove time-consuming and costly to obtain a replacement. Furthermore, some securities certificates may not be replaceable at all.

What are the Differences between Preferred Stock and Common Stock?

Stocks may be designated as common stock, which is the most widely known form, or as preferred stock. Preferred shareholders have more of a stake in the company's assets and earnings and when dividends are issued, they are paid before shareholders of common stock. in addition, when you hold preferred stock you receive dividend payouts at a regular interval and generally have a stated dividend while common stock dividends are based on company performance. Shareholders with common stock may or may not receive a dividend and are last in line to be paid when a company goes belly up and is liquidated or reorganized in bankruptcy.

What are Restricted Securities?

Some stocks are designated as "restricted" or "unregistered" because they were originally issued in a private sale or other transaction where they were not registered with the SEC. Restricted or unregistered securities may not be freely resold unless a registration statement is filed with the SEC or unless an exemption under the law permits resale.

How Can Foreign Stocks Be Bought?

Foreign corporations that sell securities in the United States must register those securities with the SEC. They are generally subject to the same rules and regulations that apply to securities of U.S. companies, although the nature of information foreign companies makes available to investors may be somewhat different.

U.S. investors who are interested in foreign securities may also purchase American Depositary Receipts (ADRs). These are negotiable receipts, registered in the name of a U.S. citizen, which represent a specific number of shares of a foreign corporation. Denominations are in U.S. dollars and the security is held by a U.S. financial institution overseas. Listed on either the NYSE, AMEX or NASDAQ, ADRs are an excellent way to buy shares in a foreign company, but keep in mind that there are still risks associated with doing so.

What are Dividend Reinvestment Plans (DRIPs)?

Dividend reinvestment plans, often referred to as DRIPs or DRPs, are associated with company-sponsored plans, but may also be purchased through a broker, and offer opportunities to make small, regular cash investments in participating companies without paying prohibitive transaction fees. Further, all or a part of your dividends can be reinvested and used to purchase more shares, although some plans offer the option to receiving dividends by check.

Treat your decision to enroll in a DRIP just as seriously as you would a decision to invest in a company. Before investing, subject the company to your usual research and analysis.

Many U.S. companies have direct stock purchase programs that allow investors to buy a company's shares directly from the company instead of using a broker. To enroll in the DRIP, contact the transfer agent or the company's shareholder relations department, and ask for an enrollment form. Then return the form, usually along with your first optional cash investment, to the company.

Once you are enrolled, you can invest more money directly through the company's transfer agent. Many companies offer an automatic investment service, that is, they will automatically withdraw a pre-set amount from your bank account to make optional cash investments. There may be a fee for this service.

Direct stock purchase plans cost an investor less, since there is no broker commission to pay, and often no fee. Some programs have automatic investment options, which will debit a set amount each month from an investor's bank account.

Dividend reinvestment isn't mandatory. Investors can receive dividend payments, and they can be automatically deposited in a bank account. Some companies that offer direct-purchase programs do not pay dividends.

As with anything else, there are positives and negatives. The main drawback associated with DRIPs is that calculation of capital-gains taxes becomes complex when dividends have been reinvested over the years, and lots have been bought at varying prices. This can be remedied by carefully keeping track of the cost basis of shares when dividends are reinvested. Further, investors who invest through an IRA need not deal with the problem of calculating capital gains taxes at all. In addition, the dividends are taxable income even though you reinvest them.

Saving for College

When should I start saving for my child's education?

This depends on how much you think your children's education will cost. The best way is to start saving before they are born. The sooner you begin the less money you will have to put away each year.

Suppose you have one child, age six months, and you estimate that you'll need $120,000 to finance their college education 18 years from now. If you start putting away money immediately, you'll need to save $3,500 per year for 18 years (assuming an after-tax return of 7 percent). On the other hand, if you put off saving until the child is six years old, you'll have to save almost double that amount every year for twelve years.

Another advantage of starting early is that you'll have more flexibility when it comes to the type of investment you'll use. You'll be able to put at least part of your money in equities, which, although riskier in the short-run, are better able to outpace inflation than other investments in the long-run.

How much will my child's college education cost?

How much will your child's education cost? It depends on whether your child attends a private or state school. According to the College Board, for the 2022-23 school year the total expenses - tuition, fees, board, personal expenses, and books and supplies - for the average four-year private college are about $57,570 per year and about $27,940 per year for the average four-year in-state public college. However, these amounts are averages: the tuition, fees, and board for some private colleges can exceed $80,000 per year whereas the costs for a state school can often be kept under $10,000 per year. It should also be noted that in 2022-23 the average amount of grant aid for a full-time undergraduate student was about $8,690 and $24,770 for four-year public and private schools, respectively. More than 75 percent of full-time students at four year colleges and universities receive grant aid to help pay for college.

How should I invest my child's college fund?

As with any investment, you should choose those that will provide you with a good return and that meet your level of risk tolerance. The ones you choose should depend on when you start your savings plan-the mix of investments if you start when your child is a toddler should be different, from those used if you start when your child is age 12.

The following are often recommended as investments for education funds:

Series EE bonds: These are extremely safe investments. They should be held in the parents' names. If the adjusted gross income of you and your spouse at the time of redemption is at or under the amount set by the tax law, the interest on bonds bought after January 1, 1990, is tax-free as long as it is used for tuition or other qualified education costs. If your adjusted gross income is above the threshold amount, the tax break is phased out.

You can exclude from your gross income interest on qualified U.S. savings bonds if you have qualified higher education expenses during the year in which you redeem the bonds. For tax year 2023, the exclusion begins phasing out at $91,850 modified adjusted gross income ($76,000 indexed for inflation) and is eliminated for adjusted gross incomes of more than $106,850. For married taxpayers filing jointly, the tax exclusion begins phasing out at $137,800 and is eliminated for adjusted gross incomes of more than $167,800. The exclusion is unavailable to married filing separately.
U.S. Government bonds: These are also investments that offer a relatively higher return than CDs or Series EE bonds. If you use zero-coupon bonds, you can time the receipt of the proceeds to fall in the year when you need the money. A drawback of such bonds is that a sale before their maturity date could result in a loss on the investment. Further, the accrued interest is taxable even though you don't receive it until maturity.
Certificates of deposit: These are safe, but usually provide a lower return than the rate of inflation. The interest is taxable. These should generally only be used by the most risk-averse investors and for relatively short investment horizons.
Municipal bonds: Assuming the bonds are highly rated, the tax-free interest on them can provide an acceptable return if you're in the higher income tax brackets. Zero-coupon municipals can be timed to fall due when you need the funds and are useful if you begin saving later in the child's life.

Be sure to convert the tax-free return quoted by sellers of such bonds into an equivalent taxable return. Otherwise, the quoted return may be misleading. The formula for converting tax-free returns into taxable returns is as follows:

Divide the tax-free return by 1.00 minus your top tax rate to determine the taxable return equivalent. For example, if the return on municipal bonds is 1 percent and you are in the 32 percent tax bracket, the equivalent taxable return is 2.6 percent (1 percent divided by 68 percent).

Stocks: An appropriate mutual fund or portfolio containing stocks can provide you with a higher yield than bonds at an acceptable risk level. Stock mutual funds can provide superior returns over the long term. Income and balanced funds can meet the investment needs of those who begin saving when the child is older.

What is the American Opportunity Tax Credit?

The American Opportunity Tax Credit (AOTC) was made permanent by the Protecting Americans from Tax Hikes Act of 2015 (PATH). The maximum credit, available only for the first four years of post-secondary education, is $2,500. You can claim the credit for each eligible student you have for which the credit requirements are met.

Income limits. To claim the American Opportunity Tax Credit, your modified adjusted gross income (MAGI) must not exceed $90,000 ($180,000 for joint filers). To claim the Lifetime Learning Credit, MAGI must not exceed $69,000 ($138,000 for joint filers). "Modified AGI" generally means your adjusted gross income. The "modifications" only come into play if you have income earned abroad.

Amount of credit. For most taxpayers, 40 percent of the AOTC is a refundable credit, which means that you can receive up to $1,000 even if you owe no taxes.

Which costs are eligible? Qualifying tuition and related expenses refer to tuition and fees, and course materials required for enrollment or attendance at an eligible education institution. They now include books, supplies, and equipment needed for a course of study whether or not the materials must be purchased from the educational institution as a condition of enrollment or attendance.

Which costs are eligible? Qualifying tuition and related expenses refer to tuition and fees, and course materials required for enrollment or attendance at an eligible education institution. They now include books, supplies, and equipment needed for a course of study whether or not the materials must be purchased from the educational institution as a condition of enrollment or attendance.

The tax law says that you can't claim both a credit and a deduction for the same higher education costs. It also says that if you pay education costs with a tax-free scholarship, Pell grant, or employer-provided educational assistance, you cannot claim a credit for those amounts.

What is the "kiddie tax?"

In the past, parents would invest in the child's name in order to shift income to the lower-bracket child. However, the addition of the "kiddie tax" mostly put an end to that strategy.

In 2023, the amount that can be used to reduce the net unearned income reported on the child's return that is subject to the "kiddie tax" is $1,250. The same $1,250 amount is used to determine whether a parent may elect to include a child's gross income in the parent's gross income and to calculate the "kiddie tax." For example, one of the requirements for the parental election is that a child's gross income for 2023 must be more than $1,250 but less than $12,500.

For 2023, the net unearned income for a child under the age of 19 (or a full-time student under the age of 24) that is not subject to "kiddie tax" is $2,500.

These rules apply to unearned income. If a child has earned income, this amount is always taxed at the child's rate.

What is a Coverdell (Section 530) Education Savings Account and who is eligible for one?

In 2023, you can contribute up to $2,000 each year to a Coverdell education savings account (Section 530 program) for a child under 18. These contributions are not deductible, but they grow tax-free until withdrawn. Contributions for any year can be made through the [unextended] due date for the return for that year. The maximum contribution amount for each child is phased out for modified AGI between $190,000 and $220,000 (joint filers) and $95,000 and $110,000 (single filers). These amounts are not indexed to inflation.

For the $2,000 contribution limit, there is no adjustment for inflation and therefore, the limit is expected to remain at $2,000.

Only cash can be contributed to a Section 530 account and you cannot contribute to the account after the child reaches their 18th birthday.

Anyone can establish and contribute to a Section 530 account, including the child, and you may establish 530s for as many children as you wish. The child need not be a dependent. In fact, he or she need not be related to you, but the amount contributed during the year to each account cannot exceed $2,000. The maximum contribution amount for each child is phased out for modified AGI between $190,000 and $220,000 (joint filers) and $95,000 and $110,000 (single filers). These amounts are not indexed to inflation.

If you have insufficient savings for your child's education when he is close to entering college, what should you do?

Many families find themselves in the same boat. Fortunately, there are ways to generate additional funds both now and when your child is about to enter school:

You can start saving as much as possible during the remaining years. However, unless your income level is high enough to support an extremely stringent savings plan, you will probably fall short of the amount you need.
You can take on a part-time job. However, this will raise your income for purposes of determining whether you are eligible for certain types of student aid. In addition, your child may be able to take on part-time or summer jobs.
You can tap your assets by taking out a home equity loan or a personal loan, selling assets or borrowing from a 401(k) plan.
You (or your child) can apply for various types of student aid and education loans.

What types of grants are available for college?

Grants. The best type of financial aid because they do not have to be paid back are amounts awarded by governments, schools, and other organizations. Some grants are need-based and others are not.

The Federal Pell Grant Program offers federal aid based on need.

Don't assume that middle class families are ineligible for needs-based aid or loans. The assessment of whether a family qualifies as "in need" depends on the cost of the college and the size of the family.
State education departments may make grants available. Inquiries should be made of the state agency.
Employers may provide subsidies.
Private organizations may provide scholarships. Inquiries should be made at schools.
Most schools provide aid and scholarships, both needs-based and non-needs-based.
Military scholarships are available to those who enlist in the Reserves, National Guard, or Reserve Officers Training Corps. Inquiries should be made at the branch of service.

Try negotiating with your preferred college for additional financial aid, especially if it offers less than a comparable college.

What types of loans are available for college?

There are various student loan programs available. Some are need-based, and others are not. Here is a summary of loans:

Stafford loans (formerly guaranteed student loans) are federally guaranteed and subsidized low-interest loans made by local lenders and the federal government. They are needs-based for subsidized loans; however an unsubsidized version is also available.
Perkins loans are provided by the federal government and administered by schools. They are needs-based. Inquiries should be made at school aid offices.
Parent loans for undergraduate students (PLUS) and supplemental loans for students are federally guaranteed loans by local lenders to parents, not students. Inquiries should be made at college aid offices.
Schools themselves may provide student loans. Inquiries should be made at the school.

How can I increase the amount of financial aid my child is entitled to?

Here are some strategies that may increase the amount of aid for which your family is eligible:

Try to avoid putting assets in your child's name. As a general rule, education funds should be kept in the parents' names, since investments in a child's name can impact negatively on aid eligibility. For example, the rules for determining financial aid decrease the amount of aid for which a child is eligible by 35 percent of assets the child owns and by 50 percent of the child's income.

If your child owns $1,000 worth of stock, the amount of aid for which he or she is eligible for is reduced by $350. On the other hand, the amount of aid is reduced by (effectively) only 5.6 percent of your assets and from 22 to 47 percent of your income.
Reduce your income. Income for financial aid purposes is generally determined based upon your previous year's income tax situation. Therefore, in the years immediately prior to and during college, try to reduce your taxable income. Some ways to do this include:

1. Defer capital gains.
2. Sell losing investments.
3. Reduce the income from your business. If you are the owner of your own business, you may be able to reduce your taxable income by taking a lower salary, deferring bonuses, etc.
4. Avoid distributions from retirement plans or IRAs in these years.
5. Pay your federal and state taxes during the year in the form of estimated payments rather than waiting until April 15 of the following year.
6. Since a portion of discretionary assets is included in the family's expected contribution from income, reduce discretionary assets by paying off credit cards and other consumer loans.
7. Take advantage of vehicles which defer income, such as 401(k) plans, other retirement plans or annuities.
Detail any financial hardships. If you have any financial hardships, let the deciding authorities know (via the statement of financial need) exactly what they are if they are not clear from the application. The financial aid officer may be able to assist you in explaining hardships.
Have your child become independent. In this case, your income is not considered in determining how much aid your child will be eligible for. Students are considered independent if they:
1. Are at least 24 years old by the end of the year for which they are applying for aid
2. Are veterans
3. Have dependents other than their spouse
4. Are wards of the court or both parents are deceased
5. Are graduate or professional students
6. Are married and are not claimed as dependents on their parents' returns

How can I save taxes on college savings?

If you decide to invest in your child's name, here are some tax strategies to consider:

You can shift just enough assets to create $2,500 in 2023 taxable income to an under age 19, child.
You can buy U.S. Savings Bonds (in the child's name) scheduled to mature after your child reaches age 18.
You can invest in equities that pay small dividends but have a lot of potential for appreciation. The dividend income earned when your child is under the age of 19 will be minimal with tax relief, and the growth in the stocks will occur over the long term.
If you own a family business, you can employ your child in the business. Earned income is not subject to the "kiddie tax," and is deductible by the business if the child is performing a legitimate function. Additionally, if your business is a sole proprietorship and your child is younger than 19 years old, then he or she will not pay social security taxes on the income.

Retirement Assets

Will my heirs owe income taxes when they inherit my retirement assets?

Yes, generally under the same rules that would apply to your withdrawals of the same amounts had you lived - unless it's a Roth IRA. A Roth IRA is exempt from federal income tax if the account was opened five years before any withdrawals.

Also, your spouse can roll over your account to their IRA. No early withdrawal penalty applies, regardless of your beneficiary's age. However, a spouse who rolled over to an IRA may owe an early withdrawal penalty on IRA withdrawals taken before age 59 1/2.

Will my heirs owe estate taxes on inherited retirement assets?

Your retirement assets will be included in your taxable estate. But because of the currently high estate tax exemption, very few estates have to pay federal estate tax. And assets passing to your surviving spouse (provided he or she is a U.S. citizen) or to charity will be excluded from estate tax.

Is estate tax deferred if my heir gets an annuity?

No. The estate is taxed on the annuity's present value.

How can I minimize or eliminate tax on inherited retirement assets?

You can minimize or eliminate tax on inherited retirement assets by using the following methods:

Leave them to your spouse. Doing so can eliminate estate tax and help postpone withdrawals subject to income tax - provided your spouse takes no withdrawals before age 59 1/2.
Leave them to charity. Although there's no financial benefit to the family, this saves income and estate taxes.
Provide life insurance to pay estate tax on retirement assets. If estate taxes are a concern, the benefit of this option is that it provides estate liquidity, avoiding taxable distributions to pay estate tax.

How should I take distributions from my retirement plan?

If your assets are in a tax-favored retirement fund such as a defined-benefit pension plan, 401(k) or IRA, you have several distribution options:

Take everything in a lump sum
Keep the money in the account, with regular distributions or withdrawals on an as-needed / as-required basis
Purchase an annuity with all or part of the funds
Take a partial withdrawal (leaving the balance for withdrawal later)
Make a rollover distribution to another retirement plan
A combination of any of the above

Your retirement assets may be distributed in kind as employer stock or an annuity or insurance contract. Sometimes certain withdrawal options may be associated with certain retirement plans; for instance, annuities are more common with pension plans. Other types of plans favor the other options, but for the most part, most of these options are available for most plans. And more than likely, you'll want to preserve the tax shelter as long as possible by withdrawing no more than you need at any given time.

Timing your withdrawal can be a factor, too. Withdrawals before age 59 ½ risk a tax penalty. At the other end, withdrawals are generally required to start at age 73 for taxpayers born between 1951 and 1959 (75 for those born in 1960 or later) or face a tax penalty. The only exceptions are Roth accounts and non-owner-employees still working beyond that age.

When should I take a lump-sum distribution from my retirement plan?

Your personal needs should decide. You may need a lump sum to buy a retirement home or business, but be aware of the tax consequences. If your employer requires that you take a lump sum distribution, it may be wise to roll it over into an IRA.

What should I do about my retirement plan assets in my ex-employer's plan if I change jobs?

There are several things you might do depending upon your needs:

If you don't need the assets to live on, try to continue the tax shelter and leave the money where it is.
Transfer or roll over the assets into your new employer's plan if that plan allows it (this can be tricky, though).
If you've decided to start your own business, set up a new retirement plan and move the funds there.
Roll them over into your IRA.

Can creditors get at my retirement assets?

In general, employer plans such as your 401(k), IRAs, and pension plan funds are protected from general creditors unless you've used these assets as securities against a loan or are entering into bankruptcy. If this is the case, there's a chance they could be seized, but if the money is in a registered IRA, pension plan, or 401(k), it's more than likely they will be protected in case of bankruptcy (subject to state and federal law of course).

How will my state tax affect my retirement withdrawals?

Each state is different, but in general, consider the following:

While withdrawals are generally taxable in states with income tax, some offer relief for retirement income up to a specified dollar amount.
If your state doesn't allow deductions for retirement investments allowed under federal law, these investments and sometimes more may come back tax-free.
State tax penalties for early or inadequate withdrawal are unlikely.

I understand that I'm required to take money out of my retirement plan after I reach age 73. Why is that?

Retirement plans offer the biggest tax shelter in the federal system since funds grow tax-free while in the plan. But the shelter is primarily intended for retirement. So when you reach 73 (or shortly after that), you must start withdrawing money from the plan.

How can I continue the tax shelter for retirement plan assets after age 73?

The shelter can continue for many of those assets for a long time, assuming you don't need them to live on. You can spread withdrawals over a period based on, but longer than, your life expectancy, for example, over a period of at least 26.5 years if you're 73 now. You are free, however, to withdraw at a faster rate or even all of it if you wish. The shelter continues for whatever is not withdrawn.

Suppose there are still retirement assets in my account at my death. Can the shelter continue for those who receive those assets?

Many rules regarding inherited retirement accounts changed with the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and the SECURE 2.0 Act of 2022. For example, if you're a spouse not more than ten (10) years younger than your deceased spouse, you will have different options than if you were more than ten (10) years younger. Due to the complexity of these rules, it is important to speak with a qualified financial advisor before making any decisions.

Can moving to another state when I retire save me state taxes on my retirement plan?

Money from retirement plans, including 401(k)s, IRAs, company pensions, and other plans, is taxed according to your residence when you receive it. You will save money on state income tax if you move from a state with a high personal income tax to one with no personal income tax. Also, some states with a state income tax don't tax retirement plan distributions. Others offer other tax relief for retirement income. However, establishing residence in a new state may take as long as one year; if you retain property in both states, you may owe taxes to both.

Retirement Plan Distributions

How should I take distributions from my retirement plan?

If your assets are in a tax-favored retirement fund such as a company or Keogh pension or profit-sharing plan (including thrift and savings plans), 401(k), IRA, or stock bonus plan, when it comes time to take distributions, you have several options:

Take everything in a lump sum
Keep the money in the account, with regular distributions or withdrawals on an as-needed basis
Purchase an annuity with all or part of the funds
Take a partial withdrawal (leaving the balance for withdrawal later)
Take a rollover distribution
A combination of any of the above

Your retirement assets may be distributed in kind-as employer stock or an annuity or insurance contract. Sometimes certain withdrawal options may be associated with certain retirement plans; for instance, annuities are more common with pension plans. Other types of plans favor the other options, but for the most part, most of these options are available for most plans. And more than likely, you'll want to preserve the tax shelter as long as possible by withdrawing no more than you need at any given time.

Timing your withdrawal can be a factor, too. Withdrawals before the age of 59 ½ risk a tax penalty. At the other end, withdrawals are generally required to start at age 73 for taxpayers born between 1951 and 1959 (75 for those born in 1960 or later) or face a tax penalty. The only exceptions are Roth IRAs and non-owner-employees still working beyond that age.

When is it best to take a lump-sum distribution from my retirement plan?

Your personal needs should decide. You may need a lump sum to buy a retirement home or business. If your employer requires that you take a lump sum distribution, it may be wise to roll it over into an IRA.

What should I do about my retirement plan assets in my ex-employer's plan if I change jobs?

There are several things you might do depending upon your needs:

If you don't need the assets to live on, try to continue the tax shelter and leave the money where it is.
Transfer or roll over the assets into your new employer's plan--if that plan allows it (this can be tricky, though).
If you've decided to start your own business, set up a Keogh and move the funds there.
Roll them over into your IRA.

Can creditors get at my retirement assets?

How will my state tax affect my retirement withdrawals?

Each state is different, but in general, consider the following:

While withdrawals are generally taxable in states with income tax, some offer relief for retirement income up to a specified dollar amount.
If your state doesn't allow deductions for Keogh or IRA investments allowed under federal law, these investments and sometimes more may come back tax-free.
State tax penalties for early or inadequate withdrawal are unlikely.

Can moving to another state when I retire save me state taxes on my retirement plan?

Money from retirement plans, including 401(k)s, IRAs, company pensions, and other plans, is taxed according to your residence when you receive it.

If you move from a state with a high-income tax, such as New York, to one with no personal income tax, such as Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, you will save money on state income tax.

However, establishing residence in a new state may take as long as one year; if you retain property in both states, you may owe taxes to both.

What is a reverse mortgage?

A reverse mortgage is a type of home equity loan that allows you to convert some of the equity in your home into cash while you retain home ownership. Reverse mortgages work much like traditional mortgages, only in reverse. Rather than making a payment to your lender each month, the lender pays you. Most reverse mortgages do not require any repayment of principal, interest, or servicing fees for as long as you live in your home.

Retired people may want to consider the reverse mortgage as a way to generate cash flow. A reverse mortgage allows homeowners age 62 and over to remain in their homes while using their built-up equity for any purpose: to make repairs, keep up with property taxes or simply pay their bills.

Reverse mortgages are rising-debt loans, which means that the interest is added to the principal loan balance each month (because it is not paid on a current basis). Therefore, the total amount of interest you owe increases significantly with time as the interest compounds. Reverse mortgages also use up some or all of the equity in your home.

All three loan plans, whether FHA-insured, lender-insured, or uninsured, charge origination fees and closing costs. Insured plans also charge insurance premiums, and some impose mortgage servicing charges.

Finally, homeowners should realize that if they're forced to move soon after taking the mortgage (because of illness, for example), they'll almost certainly end up with a great deal less equity to live on than if they had simply sold the house outright. That is particularly true for loans terminated in five years or less.

Traditional vs Roth IRAs

What's good about investing in IRAs?

There are two types of IRAs: traditional IRAs and Roth IRAs. Traditional IRAs defer taxation of investment income, and withdrawals are taxable income except for withdrawals of previously nondeductible contributions. In most cases, however, contributions are deductible. Roth IRAs are subject to many of the same rules as traditional IRAs. Still, there are several differences, the primary one being that contributions are not deductible and are made after tax, but qualified distributions are generally tax-free.

Can anyone have a traditional IRA?

If you have income from wages or self-employment income, you can contribute up to $7,000 for 2025 (also $7,000 for 2024). IRAs are available even to children who meet these conditions. Individuals aged 50 and older can contribute an additional $1,000 for a total of $8,000 for 2025 (the same as for 2024).

Can my stay-at-home spouse have an IRA?

Yes. Contributions of $7,000 for each spouse are allowed for 2025 if the couple's wages or self-employment earnings are $14,000 or more. If less, the contribution amount cannot exceed your or your spouse's taxable compensation for the year. (The same limits apply for 2024.)

What makes Roth IRAs so special?

Roth IRAs offer the following advantages:

Withdrawals, if they qualify, are completely exempt from income tax, unlike most withdrawals from other retirement plans.
You can quickly build up a Roth IRA account by converting traditional IRAs into Roth IRAs, but there is a tax cost.
Because Roth IRAs aren't subject to age-triggered required minimum distribution rules, more money can be left in an account and passed on to heirs than is allowed under other plans.

Can anyone have a Roth IRA?

Not everyone can contribute to a Roth IRA. The following conditions apply:

The ability to contribute phases out if modified adjust gross income (MAGI) exceeds certain amounts. For married taxpayers filing jointly, the 2025 phaseout range is $236,000 to $246,000. For single and head-of-household taxpayers, the 2025 phaseout range is $150,000 to$165,000. (For 2024, the phaseout ranges are $230,000 to $240,000 and $146,000 to $161,000, respectively.) You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.
As with traditional IRA contributions, you must have earnings from personal services equal to or greater than your Roth IRA contribution. The 2025 (and 2024) IRA contribution maximum of $7,000 (plus an additional $1,000 for taxpayers age 50 or older) applies to traditional and Roth IRAs on a combined basis. So your maximum Roth IRA contribution is reduced by any traditional IRA contributions you make for the year. If you make the maximum contribution to a traditional IRA, you can't contribute to a Roth IRA.

Can I set up a Roth IRA for my spouse?

Yes, subject to the income conditions above, contributions of $7,000 each are allowed for 2025 if the couple's earnings are at least $14,000 for 2025 ($15,000 if one of you is age 50 or older or $16,000 if both of you are age 50 or older. The same limits apply for 2024.) Each spouse can contribute up to the current limit; however, the combined total of your contributions can't be more than the taxable compensation reported on your joint return.

Can I set up a Roth IRA for my child?

Yes, for a child with personal service earnings and subject to the other income conditions.

What's the downside to Roth IRAs?

The following is a brief list of negative issues regarding Roth IRAs:

Roth IRA contributions are not tax-deductible.
Unless you start contributing when you're very young, to build a sizable Roth IRA, you will likely have to convert some or all of a traditional IRA. Conversions are taxable.

If a contribution to a regular IRA has been converted into a contribution to a Roth IRA, it can't be converted back into a contribution to a regular IRA. This provision prevents a taxpayer from using recharacterization to unwind a Roth conversion.

How are my heirs taxed on inherited Roth IRA wealth?

Your heirs are taxed as follows:

No tax paid on withdrawals as long as the funds have been in the Roth IRA for at least five years.
Starting in 2020 (SECURE Act), an heir inheriting a Roth IRA must withdraw the funds within ten (10) years after the account owner's death (some exceptions apply). Heirs with Roth IRAs inherited before 2020 can spread the withdrawal over their life, continuing the tax shelter for amounts not withdrawn.
Estate tax treatment is the same as for traditional IRAs.

Social Security Benefits

Who is entitled to Social Security disability benefits?

An individual who is determined to be "disabled" by the Social Security Administration receives an Award Letter, which is a notice of decision that explains how much the disability benefit will be and when payments start. It also tells you when you can expect your condition to be reviewed to see if there has been any improvement.

If family members are eligible, they will receive a separate notice and a booklet about things they need to know.

Under the Social Security disability insurance program (Title II of the Act), there are three basic categories of individuals who can qualify for benefits on the basis of disability:

A disabled insured worker under full retirement age.
An individual disabled since childhood (before age 22) who is a dependent of a parent entitled to Title II disability or retirement benefits or was a dependent of a deceased insured parent.
Disabled widow or widower, age 50-60 if the deceased spouse was insured under Social Security.
Been disabled or expected to be disabled for at least 12 months
Has filed an application for benefits, and
Completed a five-month waiting period; however, the 5-month waiting period does not apply to individuals filing as children of workers. Under SSI, disability payments may begin as early as the first full month after the individual applied or became eligible for SSI. In addition, if you become disabled a second time within five years after your previous disability benefits stopped, there is no waiting period before benefits start.

Under Title XVI or SSI, there are two basic categories under which a financially needy person can get payments based on disability:
An adult age 18 or over who is disabled.
Child (under age 18) who is disabled.

For all individuals applying for disability benefits under Title II and for adults applying under Title XVI, the definition of disability is the same. The law defines disability as the inability to engage in any substantial gainful activity (SGA) because of any medically determinable physical or mental impairment(s) which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.

Meeting this definition under Social Security is difficult. Insured means that you have accumulated sufficient credits in the Social Security system. Visit the Social Security Administration's Website to apply for an estimate.

When do Social Security disability benefits begin?

If you are getting disability benefits on your work record, or if you are a widow or widower getting benefits on a spouse's record, there is a five-month waiting period, and your payments will not begin until the sixth full month of disability. The 5-month waiting period does not apply to individuals filing as children of workers. Under SSI, disability payments may begin as early as the first full month after the individual applied or became eligible for SSI.

If the sixth month has passed, your first payment may include some back benefits. Your payment should arrive on the third day of every month. If the third falls on a Saturday, Sunday, or legal holiday, you will receive your payment on the last banking day before that day. The payment you receive is the benefit for the previous month. The payment you receive on July 3 (or dated July 3 if you get a paper check) is for June. Ninety-nine percent of recipients receive direct deposit; however, your benefit can be mailed or deposited directly into your bank account.

Are Social Security disability benefits taxable?

Some people who get Social Security must pay taxes on their benefits. The rules are the same regardless of whether Social Security benefits are received due to retirement or disability. You must pay taxes if you file a federal tax return as an "individual" and your combined income is more than $25,000. Combined income is defined as your adjusted gross income + Nontaxable interest + 1/2 of your Social Security benefits. If you file a joint return, you may have to pay taxes if you and your spouse have a combined income of more than $32,000. If you are married and file a separate return, you will probably pay taxes on your benefits. Social Security has no authority to withhold state or local taxes from your benefit. Many states and local authorities do not tax Social Security benefits. However, you should contact your state or local taxing authority for more information.

How long do Social Security disability payments continue?

Your disability benefits generally continue for as long as your impairment has not medically improved and you cannot work. They will not necessarily continue indefinitely, however.

Because of advances in medical science and rehabilitation techniques, an increasing number of people with disabilities recover from serious accidents and illnesses. Also, through determination and effort, many individuals overcome serious conditions and return to work in spite of them.

What happens to Social Security disability benefits when I reach retirement age?

If you are still getting disability benefits when you reach retirement age, your benefits will be automatically changed to retirement benefits, generally in the same amount. You will receive a new booklet explaining your rights and responsibilities as a retired person.

If you are a disabled widow or widower, your benefits will be changed to the regular widow or widower benefits (at the same rate) at 60. You will receive a new instruction booklet that explains the rights and responsibilities for people who get survivor benefits.

What happens if Social Security turns down my claim for disability benefits?

If you disagree with SSA's decision, you can appeal it. You have 60 days to file a written appeal (either by mail or in person) with any Social Security office. Generally, there are four levels to the appeals process. They are:

Reconsideration. Your claim is reviewed by someone who did not take part in the first decision.
Hearing before an Administrative Law Judge. You can appear before a judge to present your case.
Review by Appeals Council. If the Appeals Council decides your case should be reviewed, it will either decide your case or return it to the administrative law judge for further review.
Federal District Court. If the Appeals Council decides not to review your case or disagree with its decision, you may file a civil lawsuit in a Federal District Court and continue your appeal to the US Supreme Court if necessary.

If you disagree with the decision at one level, you have 60 days to appeal to the next level until you are satisfied with the decision or have completed the last level of appeal.

You have two special appeal rights when a decision is made that you are no longer disabled.

They are as follows:
Disability Hearing. As part of the reconsideration process, this hearing allows you to meet face-to-face with the person reconsidering your case to explain why you feel you are still disabled. You can submit new evidence or information and bring someone who knows about your disability. This special hearing does not replace your right to also have a formal hearing before an administrative law judge (the second appeal step) if your reconsideration is denied.
Continuation of Benefits. While appealing your case, you can have your disability benefits and Medicare coverage (if you have it) continue until an administrative law judge decides the outcome. However, you must request the continuation of your benefits during the first ten days of the 60 days mentioned earlier. If your appeal is unsuccessful, you may have to repay the benefits.

Will I receive Social Security when I retire?

Retirement benefit calculations are based on your average earnings during a lifetime of work under the Social Security system. For most current and future retirees, The Social Security Administration (SSA) averages your 35 highest years of earnings. Years in which you have low earnings or no earnings may be counted to bring the total years of earnings up to 35.

You can collect early retirement benefits at age 62, but keep in mind that for anyone born from 1943 to 1954, the full retirement age is 66, and it increases gradually until it reaches 67 for those born in 1960 and later. Then you can collect additional benefits for every year you delay your retirement until age 70. After you begin to collect Social Security benefits, you will continue to receive them for life.

How can I find out what Social Security will pay me when I retire?

You can create a my Social Security account with SSA and view your Social Security Statement online at any time.

Can I count on Social Security being around when I retire?

With retirement on the horizon for scores of baby boomers, Social Security will likely be in your future; however, the Social Security trust fund will be less and less able to pay benefit increases, which increase annually as the taxable wage base rises without some kind of reform.

Insurance

Car Insurance

How can I lower my car insurance costs?

If you're trying to lower your auto insurance premiums, try using the following tactics:

Comparison shop
Take a higher deductible
Drop collision damage on older cars
Buy a low-profile car
Check insurance costs by community when you are planning a move
Do not duplicate medical coverage
Pay premiums annually
Inquire about discounts

What coverage should my auto policy include?

Everyone should have liability coverage for bodily injury and for property damage. These options will protect you if you injure someone else or damage property with your car. One thing to keep in mind is if you're in an accident and your costs exceed your coverage limits, you are responsible for the additional amount. That's why many motorists opt for more coverage than their state's minimum requirements.

Most insurers recommend that you buy at least $100,000 per person with a $300,000 maximum for each accident to pay medical costs, loss of earnings, and pain and suffering. In addition, you should have at least $50,000 in coverage for property damage. Collision and comprehensive are essential for new cars but often can be dropped with an older car. They cover repairs to your car after an accident or in case of fire, theft, or vandalism.

Uninsured motorist coverage, which protects against hit and run and people without enough insurance, is required in some states. If your life, health, and disability policies already protect your family, you might want to pass, given the choice. The same is true of medical payments coverage, which pays you in the case of injury and disability. For people with substantial assets, umbrella insurance is a good idea. It will protect you against liability judgments in excess of $1 million.

Auto insurance is mandatory in every state, but coverage amounts vary among policies. At a minimum, however, the following areas should be covered:

Medical: This protects you against medical costs for injuries to you and other riders in the car.
Liability: This covers physical injuries to other people and compensation for expenses that might arise from such injuries. It also covers damage to other people's property.
Comprehensive and collision: This covers damage to your car due to collisions or overturning, fire, flooding, and theft. There is usually a deductible.
Uninsured (or underinsured) motorist: If there is an accident and the other driver has insufficient insurance, this covers the expenses of the accident.

Note: In certain states with "no-fault" insurance laws, personal insurance protection coverage is required and there are some restrictions on liability lawsuits.

Your policy will show the total amounts of bodily injury, liability, and property damage coverage. For instance, a policy of $25/$50/$20 means that, in a single accident, you are covered for $25,000 for an individual injured, $50,000 for all persons injured, and $20,000 of property damage.

The amount of coverage you choose will depend on the state's minimum requirements, the replacement cost of your vehicle, and how much medical coverage you already have under other policies.

How should I handle an auto insurance claim?

Here are some tips for making sure that you obtain a fair settlement and obtain payment on a claim as quickly as possible.

Start a file on the accident immediately after it occurs and put hospital bills, police accident reports, and copies of claims you have submitted into the folder.
Each time you speak to an insurance company representative by phone, write a follow-up letter or email summarizing what was said. Include the date of the conversation and the name of the person spoken to. Put a copy of the letter or email into the file.
If it is taking a long time to obtain your settlement, check your policy to see whether interim rental car expenses are covered. If so, rent a car. The insurer will be motivated to speed things along to avoid incurring this cost.
If you feel the company is being unreasonable and is delaying or not acting in good faith, then make a complaint to your state's insurance regulator.
If you're getting nowhere, consult an attorney.

Does it make sense to comparison shop for car insurance?

Don't assume that every insurance company charges the same rates. There are several thousand different auto insurers and all of them are vying for your business. It's possible to save as much as 30 to 50 percent by comparing costs.

Costs are usually based on factors such as age, gender, and driving record of the vehicle's driver's); state of residence; age and value of the vehicle; and frequency and purpose of the vehicle's use.

First, contact the insurance regulating body in your state and find out whether they provide a free pamphlet that ranks insurers by price. Many state insurance departments do this. Obtaining this pamphlet will save you a lot of time on the phone asking for price quotes. If no pamphlet is available, then get quotes from independent agents (those who represent several insurance companies) or visit insurer's websites.

You can also begin by comparing several insurers' rates such as:

AMICA 800-24-AMICA
GEICO: Auto Insurance 800-861-8380
Erie Insurance: 800-458-0811
USAA: 800-531-8722 (Note: USAA is limited to active-duty and former military officers and their families.)

When calling an insurance company, ask if the insurer is a "mutual company"--one owned by its policyholders--as is the case with Amica. If so, ask what percentages of its premiums are returned to policyholders. You may find, for example, that Amica's premiums are higher than those of some other companies, but that it pays annual dividends of 18 percent to 20 percent to policyholders. These dividends reduce your insurance costs.

Tip: Check the financial ratings of insurance companies with Moody's, and then supplement your review by calling your state insurance department for further information. Some state insurance departments will supply you with the number of justified complaints that have been made about insurers.

How much of a deductible should I take on my car insurance?

It may pay to absorb the cost of fender-benders yourself. In other words, get the highest deductible you can afford. The deductible is the dollar amount you agree to pay out-of-pocket before insurance kicks in. If you cover the cost of small claims and the insurance company covers the large ones, it makes a huge difference: raise your deductible from $100 to $500, for example, and you'll reduce your premiums by 10 percent to 20 percent. Raise the deductible to $1,000 and you can save 25 percent to 30 percent.

Tip: Don't file a claim for a minor accident when the cost to repair your vehicle is only a couple of hundred dollars. Picking up the cost yourself will more than offset the rise in your insurance rates that occurs when you file a claim.

Is it worthwhile to maintain collision coverage on older cars?

Collision coverage takes care of the cost of repairing your car if you're in an accident, regardless of who's at fault; comprehensive pays if your car is stolen or damaged by fire, flood, hail or wind. If your car isn't worth much, why pay a premium for repairs on a vehicle you'll probably replace if it's badly damaged? Collision damage for an older car can cost more than the car is worth.

If your car is worth a few thousand dollars it may not be cost effective to pay for this coverage.

Tip: The rule of thumb--from the Consumer Federation of American group: Drop collision if your premium is equal to 10 percent or more of the value of your car. But remember that you generally can't drop collision until your auto loan is paid off.

Tip: Check the value of your old car in the "National Automobile Dealers Association Official Used Car Guide," known as "The Blue Book." Auto dealers, banks and libraries have copies.

Does the kind of car I buy affect my insurance?

Before you buy a new or used car, check into insurance costs. Cars that are expensive to repair, or that are favorite targets for thieves, have much higher insurance costs.

Not surprisingly, the more expensive the car, the more expensive the insurance. Cars that thieves love --Porsches, Jaguars, BMWs and sports models in general, are more costly to insure. The latest study shows that it costs three to four times as much to insure a Porsche as a Buick or a Ford.

Tip: Call your insurance company or agent before buying a car and ask what the costs are for several different models.

If you buy a used car, insurance will be significantly lower.

Does my address affect my car insurance?

Costs tend to be lowest in rural communities and highest in cities.Additionally, rates vary within cities based upon the incidence of auto thefts and damage within particular areas. Very often zip codes or common streets are used to denote where rates change. If you are planning a move to a new city, call your agent to find out what car insurance costs in different neighborhoods or suburbs. While differences in cost will not likely sway your decision as to which house to rent or buy, doing this may give you an idea which areas you should consider or avoid.

Does it make a difference if I pay my insurance annual, semi-annually or monthly?

Installment plans are convenient but wind up costing more because of fees or interest charges. You are usually better off paying the entire insurance bill when you receive it.

What types of auto insurance discounts are available?

Most insurance companies will reduce premiums 10 percent to 20 percent for various reasons, such as alarm systems, airbags, anti-lock brakes, insuring more than one car, and bundling home and auto insurance. There are also safe driver discounts and discounts if you live close to work. Your agent may not think to advise you of all of the available discounts, so it pays to ask your agent for a list of all discounts available and what requirements must be met to take advantage of them.

What's the most cost-effective way to prevent car theft?

The extent to which you go to protect yourself from car theft will depend on (1) how attractive your car is to thieves, and (2) how much money you're willing to spend. You can use the following methods:
Common-sense (no cost) measures

First, always park in safe, well-lighted, well-patrolled areas, don't leave your key in the ignition, and make sure to lock all the doors and close the windows.

Also, don't leave items that might be attractive to thieves in the car. Thieves may break a window, even risking a car alarm, to get to a briefcase, a pocketbook, CDs, a leather jacket, or a pair of sneakers. If you've been out shopping, lock your purchase in the trunk. Don't leave them in plain site as temptation for would-be thieves.

Deterrent devices

These are devices, such as steering wheel locks and alarm systems, intended to deter theft. We'll start with the least expensive options.

Clubs, shields, and cuffs. These devices are fairly inexpensive, but they are ineffective against a determined thief, who can simply saw through the steering wheel. Therefore, if you have a car model that is sought after by car thieves, you'll probably need more than a club or shield. There is also a collar available to cover your steering column (for cars where the ignition is on the steering column).

Tracking systems. There is one tracking device on the market-the LoJack system. This is a system that allows authorities to track your car if it's stolen.

Alarm systems. If your car doesn't have a factory-installed alarm system, you can have one installed, or buy a model that you install yourself. Alarm systems usually include an alarm that sounds when the car is struck or the door or trunk is opened, lights that flash on occurrence of the same eventualities, and a device that disables the starter, ignition, or fuel system. When you leave the car, you set the alarm with a remote control device. If you choose "passive arming," the system arms itself automatically 30 seconds after you close the door. Alarm systems have a panic button that you can press in an emergency.

Disability Insurance

Should I purchase my own disability insurance policy?

Many of us have life insurance, however very few of us have long-term disability coverage. Yet according to statistics, workers are more likely to sustain a long-term disability (one lasting longer than 90 days) than die at an early age.

Long-term disability insurance is fairly expensive, and people tend to think that they will be protected by workers' compensation or other sources. However, Social Security, workers' compensation, and employer-offered long-term coverage are often inadequate.

How much disability insurance should I have?

A disability insurance company will usually not cover you for more than 60 percent of your income. Look for a policy that provides coverage for this level. When you shop for a disability policy, be ready to prove your income level. If you purchase the policy and pay the premiums yourself, the income received will not be taxable. Therefore, 60 percent should come close to replacing your after-tax income.

What does workers compensation insurance cover?

Worker's compensation covers injuries that happen on the job. Benefits vary widely from state to state but typically are equivalent to 66.67 percent of the average weekly wage for the previous 52 weeks. In addition, most states pay benefits for the employee's lifetime in cases of permanent total disability.

Tip: To get details on worker's comp benefits, contact your state Department of Labor.

In addition to the requirement that an injury is work-related, the payments you would receive under worker's comp may be inadequate.

How is disability defined?

The definition of disability in a policy is extremely important. It tells you under what circumstances you will qualify to receive benefits.

Own-occupation coverage pays benefits if you can't work in your chosen field--if you are an attorney or teacher, for example. Own-occupation policies are the most expensive type of disability coverage because they provide the broadest coverage. Generally, if you cannot perform the duties of your own occupation, you can take a job in a related field, make a decent income, and still collect the benefits.

Any-occupation coverage pays benefits if you can't work at any occupation for which your education level and training has prepared you. Therefore, if you can no longer perform the duties of a nuclear physicist, but you can teach physics at college level, you will not receive benefits.

Note: Many policies are own-occupation for a period of years, at which point they convert to any-occupation.

How does long-term care insurance work?

By 2020, 12 million older Americans will need long-term care. Most will be cared for at home; family and friends are the sole caregivers for 70 percent of the elderly. A study by the U.S. Department of Health and Human Services says that people who reach age 65 will likely have a 40 percent chance of entering a nursing home. About 10 percent of the people who enter a nursing home will stay there five years or more.

Your chances of needing long-term care vary with your age, health, family history and longevity, exercise habits, diet, smoking, and gender; however, women are often at higher risk simply because they live longer.

Long-term care insurance policies pay a set dollar amount per day for covered care during the benefit period stated in the policy.

Example: You choose a policy that pays $160 per day for five years. The maximum that policy will pay is $292,000 ($160 per day, times 365 days, times 5 years).

The older the individual covered, the higher the premium is. For instance, premiums for a set amount of coverage on a 70-year-old individual are about three times those that would apply to a 50-year-old.

Most long-term care policies are indemnity-type policies, meaning they will pay (up to the policy's limits) for actual charges by the care provider. Some long-term care policies, instead of being based on indemnity, pay daily benefit amounts to the insured rather than paying for actual charges. The latter type of policy offers insureds greater flexibility (e.g., allowing them to pay for home care) and less paperwork.

In a long-term care policy, what is the elimination period?

This period constitutes the number of days the insured must wait after becoming eligible for benefits before coverage actually begins.

The elimination period can range from zero to 90 days, or up to one year. The longer the elimination period, the lower the premium is.

How should I select a long-term care insurance provider?

If you decide that long-term care insurance (LTCI) is your best option, it is important to shop around for the right company. Some states have enacted important consumer protections in the LTCI area, while others have not. Do not assume the company is a safe bet just because it is licensed by the state insurance department to sell LTCI.

No matter how good a policy sounds, it is worth little if the company won't be there when it comes time to pay. Buy from a company with strong financial reserves. Unfortunately, there is no foolproof method for determining which companies are financially strong. However, it pays to look up a company's rating by A.M. Best or Standard and Poor's, both of which evaluate the financial health of insurance companies.

Tip: Purchase long-term care insurance from a company that has an A+ or A++ rating from Best or an A, AA, or AAA rating from Standard and Poor's. Most public libraries have these references.

When can I qualify for Medicaid insurance?

Eligibility rules vary from state to state, but beneficiaries are generally required to "spend down" their income and assets to qualify. New laws in many states make it possible for the spouses of Medicaid nursing home residents to keep more income and assets than previously allowed.

By law, nursing homes cannot discriminate against Medicaid patients, but in reality, many keep "waiting lists" for them while enrolling patients with more income and assets. Medicaid coverage for home care is very limited in most states.

Homeowner's Insurance

How can I get the best homeowner's insurance at the best price?

Shop around
Raise your deductibles
Buy home and auto policies from the same company
Check a home's insurance cost prior to purchase
Don't insure land
Increase home security
Stop smoking
Check your policy once a year

How much homeowner's insurance should I buy?

Insure For 100 percent of Rebuilding Costs

Do You Have a Replacement Cost Policy?

Find Out About Flood Insurance

If your home is in an area prone to flooding, contact your insurance agent or the Federal Insurance Administration at (800) 638-6620 and ask about the National Flood Insurance Program.

How can I make sure my homeowner's insurance is adequate?

Check Your Policy and Keep Your Agent Informed

Make sure your agent knows about any improvements or additions to your house that have been made since you last discussed your insurance policy.

Contents Insurance: Make a List of All Your Personal Possessions

Check Your Policy for Special Limits

Check the limits on certain kinds of personal possessions, such as jewelry, artwork, silverware, and furs.

This information is in Section 1, Personal Property, Special Limits of Liability. Some insurance companies also place a limit on what they'll pay for computers and other home office equipment.

If the limits are too low, consider buying a special personal property "endorsement" or "floater."

How Should I shop for a Home Insurer?

When talking to insurers, ask them what they could do to lower your costs. Once you've narrowed your search to three companies, get price quotes.

Tip: Don't consider price alone. The insurer you select should offer both a fair price and excellent service. Quality service may cost a bit more, but it provides added conveniences. Talking to insurers will give you a feel for the type of service they offer.

How much of a homeowner's deductible should I have?

Deductibles on homeowners' policies typically start at $250. Increasing your deductible saves you money.

Should I buy home and auto policies from the same company?

Some companies that sell homeowner's, auto, and liability coverage will take 5 to 15 percent off your premium if you buy two or more policies from them.

Should insurance costs be a factor in the home purchase decision?

Does your town have full-time or volunteer fire service? Is the home close to a hydrant or fire station? The closer it is to either of these, the lower your premium will be.

Should I insure the entire home cost including land?

Insuring the value of the land under your house is not necessary because land isn't at risk from theft, windstorm, fire or other disasters.

Does home security reduce insurance cost?

Tip: Before you buy an alarm system, find out what kind your insurer recommends and how much you'd save on premiums.

Do home insurers offer discounts for non-smokers?

Some insurers offer to reduce premiums if all the residents in a house don't smoke. Ask your insurer if this discount is available.

How often should I review my homeowner's policy?

Compare the limits in your policy with the value of your possessions at least once a year, to make sure your policy covers major purchases or additions to your home.

Tip: On the other hand, you don't want to spend money for coverage you don't need. If your five-year-old fur coat is no longer worth the $20,000 you paid for it, reduce your floater and pocket the difference

Should I buy private or governmental sponsored storm insurance?

Life Insurance

How do insurance companies classify individuals for rate purposes?

Premiums vary among insurance companies so it's a good idea to comparison shop in order to get the best premium. It's also helpful to understand how premiums are calculated by insurers. Here's a quick look at how this works.

Insurance companies place individuals into four risk groups: preferred, standard, substandard, or uninsurable. A terminal illness at the time you apply for insurance will render you uninsurable. Having some type of chronic illness will place you in the substandard category. People with conditions such as diabetes or heart disease can be insured, but will pay higher premiums.

If you have a high-risk job or hobby, you will be considered substandard, a high risk.

The premiums charged will be commensurate with the category you are placed in. Thus, a standard risk will pay an average premium for similarly situated insurers.

One company's category for you may not be the same as another company's category, so it still pays to shop for insurance with other companies even though one may have labeled you "substandard."

Once an insurance company approves you for coverage, you cannot be dropped unless you stop paying your premium.

What questions should I ask my life insurance agent?

Here are some questions to ask about policies:

How do cash values accumulate? An early, rapid build-up is generally preferable.
How has the policy's cash value performed in the past? You can get this information from a publication called Best's Review, Life-Health Insurance Edition. Determine how the policy performed in comparison with the company's projection and with other insurers.
Are any special features merely bells and whistles, or do they add value for you?
What is the company's rating with A.M. Best, Standard & Poor's, and Moody's? You can find these publications in public libraries or online. The rankings should be in the top three to ensure that a company has financial stability.

What should I watch out for when buying life insurance?

Policy provisions that are hard to understand and compare. Many insurance company products contain investment features as well as insurance elements. Because these insurance products are very complex and have many variations, most clients cannot understand them. As a result, rates cannot easily be compared.

Pushing inappropriate policies. Make sure your agent carefully identifies your needs and explains why the policy is suitable for you. You may want to have your accountant or financial planner review any recommended policies before you make any purchases.

High commissions. Make sure you review the costs of any recommended policy carefully. As much as 80 percent of your first-year premium might go into the pocket of the insurance agent.

Due to administrative costs and commissions paid to agents the expected rate of return on insurance policies is generally low. If you want both insurance and investment returns, unbundle your needs. Get your life insurance from the insurance company (at the lower premium for pure, term insurance) and put the premium savings (the investment element) into a more profitable investment vehicle, where your return at age 65 will be substantially higher than through the insurance company's annuity.

Safety of investment. Check an insurer's rating before purchasing a policy. Even venerable companies such as Lloyd's of London can be wiped out by unexpectedly high claims and the insured's investment (as well as life insurance proceeds) can be lost.

How do I compare the cost of several insurance policies?

In most states, there are rules, set by a group of state insurance regulators, requiring the agent to calculate two types of cost indexes that can help you to shop for a policy. You can use these indexes to compare policy costs.

One type of index, the net payment index, gauges the cost of carrying your policy for the next ten or twenty years. The lower the number is, the less expensive the policy will be. This index is useful if you are most interested in the death benefit aspect of a policy, as opposed to the investment aspect.

The other type of index, surrender cost index, is useful to those who have a high level of concern about the cash value. This index may be a negative number. The lower the number is the less expensive the policy will be.

These two indexes apply to term and whole life policies; however, with universal life policies, you'll need to focus on the cash value growth and the cash surrender value to make comparisons. "Cash surrender value" is the amount you receive if you cancel the policy. It is not the same as "cash accumulation value."

If you are shown two universal life policies, and they have the same premium, death benefit, and interest rate, then in most cases, the one with the higher cash surrender value is generally the better policy.

Do I really need life insurance?

The purpose of life insurance is to provide a source of income for your children, dependents, or whoever you choose as a beneficiary, in case, of your death. Life insurance can also serve other estate planning purposes, such as giving money to charity on your death, paying for estate taxes, or providing for a buy-out of a business interest.

Whether you need to buy life insurance depends on whether anyone is depending on your income. If you have a spouse, child, parent, or some other individual who depends on your income, then you probably need life insurance. Here are some typical families and a summary of their need for life insurance:

Adults with no children or other dependents. If your spouse could live comfortably without your income, then you will need less insurance than the people in Situation (1). However, you will still need some life insurance. At a minimum, you will want to provide for burial expenses, for paying off whatever debts you have incurred, and for providing an orderly transition for the surviving spouse.

Single adults with no dependents. You will need only enough insurance to cover burial expenses and debts unless you want to use insurance for estate planning purposes.

Children. Children generally need only enough life insurance to pay burial expenses and medical debts. Many advisors recommend self-insuring for children rather than buying an insurance policy.

Retirees. There is less of a need for life insurance after retirement unless it is to be used for estate planning purposes. You may need to provide an income for the second spouse to die if your retirement assets are not large enough. Further, you will need some insurance to pay burial expenses, final medical costs, and debts.

How much life insurance should I buy?

Determining how much insurance to buy requires you to calculate your current annual household expenses, followed by your assets, debts, and other sources of income. Your financial advisor can assist you in this computation.

The ideal amount of coverage is the amount that would allow your dependents to invest it after your death and maintain their desired standard of living without touching the principal. Although the old rule of thumb to buy five, six or seven times your annual salary may serve as a starting point, it is no substitute for making the calculations to find out how much you really need.

It's important to be as accurate as possible in estimating your family's needs since an underestimation could lead to your being underinsured, and an overestimation will lead to money wasted on unnecessary coverage.

To accurately estimate your family's annual income needs, it's helpful to have the following documents with you: Online bank statements or checkbook register for one year, a year's worth of credit card statements, and last year's tax return.

What type of life insurance should I buy?

Once you have an idea of how much coverage you need, you can decide which type of insurance product would be best to fill those needs. Although the array of insurance products may seem confusing, there are really just two types of insurance: term and cash value, which is more commonly referred to as whole life, universal life, or permanent life insurance.

With term insurance, you pay for coverage for a specified amount of time, and if you die during that time the insurer pays your survivors the death benefit specified. Cash value on the other hand provides you with some other redeemable value in addition to paying a death benefit. For individuals age 40 or less, a term policy will almost always be less costly than a whole life policy. Although term policies do not build cash values, many are convertible to whole life policies without a physical exam. Thus, a term convertible policy may be a good option for someone who is under 40.

Term Insurance

There are various types of term insurance including:

Renewable. A renewable term policy is the most common type of life insurance where the policy renews automatically on a renewable term, e.g. every year, every 5 years, every 10 years, or every 20 years, which is the most popular renewal term. You do not need to take a physical or verify the fact that you are employed. The premium goes up at the beginning of each new term to reflect the fact that you are older. Most renewable term policies can be renewable until you reach age 70 or so.

Re-entry. With this type of policy, you must undergo a physical exam after a certain period, or pay an extra premium.

Level. With level term policies, the premium is guaranteed to stay the same over a certain period. This period may be shorter than the term of the policy. Nearly all life insurance bought today is level term insurance.

Decreasing. With a decreasing term policy, a good option for insuring mortgage payments the face amount of the policy decreases over time while the premium payments remain the same.

Return of Premium. Some insurers offer term life with "return of premium." Typically, premiums are significantly higher and they require keeping the policy in force to its term.

Cash Value Life Insurance

There are four types of cash value life insurance: (1) whole life, (2) universal life, (3) variable universal life and (4) variable whole life. The first two types are the most common and have a guaranteed cash surrender value; in the last two types, the cash surrender value is not guaranteed.

Whole Life. This is the traditional life insurance policy. It provides a death benefit, has a cash value build-up, and sometimes pays dividends. You do not need to renew a whole life policy. As long as you pay your premiums, you will have coverage, usually until your death. The premium for a whole life policy remains the same for the amount of time you own the policy; the premium is "level" in insurance parlance. Thus, when you are younger, the premium you pay for whole life will be greater than what you would pay for term insurance but when you are older, the premium will be much less than a term premium. Part of each premium goes into the cash value of your policy. Your cash value, which is actually an investment, is guaranteed to grow at a fixed rate. You do not have to pay current income taxes on the growth in the cash value-it is tax-deferred.

You can borrow against your cash value at a rate that is usually better than the prevailing consumer lending rates. If you die with an outstanding loan amount, the loan amount, plus interest, will be subtracted from your death benefit.

Dividend-paying whole life policies-termed "participating" policies are usually offered by mutual life insurance companies. Mutual life insurance companies are generally owned by policyholders while other insurance companies are owned by shareholders. The dividends are refunds of insurance premiums that exceed a certain level. They are paid when the insurance company does well during a quarter or a year. Of course, premiums for participating policies are usually higher than those paid for non-participating policies.

Term policies can also be participating, but the dividends paid are usually minimal.

Universal Life. Universal life, also known as "flexible premium adjustable life," is similar to whole life, but offers more flexibility in terms of payment of premiums and cash value growth. With a universal life policy, your monthly premium amount is first credited to your cash value. The company then deducts the cost of your death benefit and the expenses of the policy. These costs are about equal to what it would cost to buy term coverage. As with whole life, your cash value grows at a fixed minimum rate of interest. The growth of the cash value is tax-deferred, and you can borrow against it or make partial withdrawals.

A special feature of universal life is that you can vary the premium paid from month to month. You can pay more or less-within certain limits-without jeopardizing your coverage. You can even let the cash value absorb the premium. However, the danger here is that if the premium payments fall too low, your policy may lapse. While some states require the insurer to tell you when your cash value is at a dangerously low point, you will, if you live in another state, have to maintain a careful watch on the amount of cash value if premiums are skipped.

Variable Universal Life. Variable universal life allows you to choose the investment for your cash value. You have a potentially greater cash value growth, but you also have added risk, depending on the type of investment you choose.

Variable Whole Life. With variable whole life, the death benefit and cash value will depend on the performance of an investment fund that you choose. Again, you have potentially greater reward, with its accompanying risks.

Should children have life insurance?

Since the purpose of life insurance is to provide for dependent survivors, children generally need only enough life insurance to pay burial expenses and medical debts. Yet, 25 percent of cash-value life insurance policies sold covers the life of a child under 18. Cash value life insurance; either whole life or universal life combines a death benefit with a savings or investment element.

Alternatives to covering the costs of a child's death include (1) using funds already set aside for college and (2) taking out a rider on a parent's policy (if available).

How do I balance life insurance with my other investments?

Get term life insurance if you haven't bought a policy yet. Then invest as much as you can in tax-deferred IRAs and 401(k) plans. If your money is in stock funds, you are more likely to experience bigger gains than you are with a cash-value policy.

If you already have a cash-value policy, don't sell it. Just realize that it is a conservative, long-term investment. The cash value eventually may be substantial because it is a tax-deferred investment. It may take 15 years or more, however, to produce a respectable return, similar to high-quality corporate bonds or long-term CDs. Balance your policy with investments such as stock funds, with a higher, long-term return.

Long-Term Care Insurance

Should I buy long-term care insurance?

Long term care insurance (LTCI) is both complex and controversial. It covers certain nursing home costs and sometimes home health care. Here is a summary of some of the main points for and against purchasing such coverage.

Reasons Against:

Inability to afford the premiums, or not having enough assets to protect. In such a case, the individual will quickly qualify for Medicaid.
Some LTCI policies lack sufficient home care coverage to keep an individual out of a nursing home unless family members or informal caregivers are available to help in providing care. Thus, if your goal is to avoid nursing homes at all costs, LTCI may not be the best way to go.
LTCI policies return from 60 percent to 65 percent of total premiums paid in benefits. This is much less than returns from other types of health insurance.
The fact that LTCI policies are improving: In a few years, you may be able to get a better deal.

Reasons Against:
LTCI, although expensive, may provide protection against costly care. While the premiums may be wasted if you never need long-term care if you do need the care the insurance can effectively pay back your premiums many times over.
If you have family caregivers, the extra home care coverage in LTCI might make it possible to remain at home longer.
LTCI premium costs increase with age. Once you develop a serious medical condition, you probably won't qualify for coverage. Thus, it is better to buy LTCI early in the game if at all.

Some Guidelines
Do not buy long-term care insurance unless all of the following apply to you:
Each person in the household has more than $75,000 in assets (not counting the value of the primary residence)
Your annual retirement income per person in the household is over $30,000
You can pay premiums without having to "go without"
You could continue to afford the premiums, even if they increased by 20 percent or 30 percent in the future

What are the alternatives to long-term care insurance?

Here are some options for paying for long-term care, along with their advantages and drawbacks:

Applying For Medicaid

Reverse mortgages and other forms of home equity conversion are often viable alternatives for those who wish to remain at home. Seniors borrow money against the equity in their homes and defer repayment until they die or sell their house. However, for these options to make sense, a home must have a high monetary value and be fully or mostly paid for, and the individual must intend to stay in the home for the long term.

Self Insurance

Self-insurance - paying for costs if they arise - is a gamble but is the current strategy of choice for the majority. Self-insurance makes the most sense for people with major assets; for those who can afford a long nursing home stay and; for people of modest means, who would quickly qualify for Medicaid anyway.

How much does long-term care insurance cost?

Premiums for LTCI vary greatly, depending on your age at the time of purchase, the comprehensiveness of the coverage, and the company selling the plan.

According to the 2023 Long-Term Care Insurance Price Index survey published by the American Association for Long-Term Care Insurance (AALTCI), a traditional policy valued at $165,000 in benefits can cost $900 annually for a 55-year-old male. The equivalent coverage for a 55-year-old woman is $1,500. A couple both age 65 could expect to pay $3,750 combined. The two policies could provide each with $165,000 of future benefits. Adding an option that increased future benefits (inflation protection) by three percent annually would cost the couple almost twice as much ($7,150 combined). Costs vary significantly from insurer to insurer even for identical policies so it's always a good idea to shop around.

But, no matter how good a policy sounds, it's worth little if the company won't be there when it comes time to pay, so you should always buy from a company with strong financial reserves. Unfortunately, there is no foolproof method for determining which companies are financially strong. However, it pays to look up a company's rating by M. Best or Standard and Poor's, both of which evaluate the financial health of insurance companies.

Purchase long-term care insurance from a company that has an A+ or A++ rating from Best or an A, AA, or AAA rating from Standard and Poor's. Most public libraries have these references.

What should I look for in a long-term care insurance policy?

When you compare long-term care insurance policies, consider the following:

Flexibility. A policy that covers nursing homes should also cover assisted living, a better alternative for many people who can no longer live on their own. If you want a policy with home care, look for one that offers a full range of community-based services, including adult daycare, or that pays you a monthly cash allowance to spend as you please for care.

Eligibility. Look for a policy that bases eligibility on the need for help with activities of daily living. Policies that only pay for "medically necessary" care are not usually a good buy. To be sure you are covered for Alzheimer's disease, choose a policy that covers cognitive as well as physical disability and pays benefits if you meet either criterion.

Inflation. If you purchase a policy before the age of 75, inflation protection is essential to ensure adequate coverage when you need long-term care at some point in the future. Buy a policy that has an additional cost but automatically increases benefits at the rate of 5 percent annually.

Duration. Keep in mind that the chances of needing long-term care for five years or longer are relatively small. For most people, a policy covering two or three years will be more cost-effective.

Do I need long-term care insurance?

A study by the U.S. Department of Health and Human Services says that people who reach age 65 will likely have a 40 percent chance of entering a nursing home; however, the risk of needing nursing home care before age 75 is relatively low. Also, most people will not need nursing home care for longer than a year.

Your chances of needing long-term care vary with your age, health, family history and longevity, exercise habits, diet, smoking, and gender. Women are at higher risk because they live longer.

How does long-term care insurance work?

Long-term care insurance policies pay a set dollar amount per day for covered care during the benefit period stated in the policy.

Example: You choose a policy that pays $160 per day for five years. The maximum that policy will pay is $292,000 ($160 per day, times 365 days, times 5 years).

The older the covered individual, the higher the premium. For instance, premiums for a set amount of coverage for a 70-year-old individual are about three times those that would apply to a 50-year-old.

Most long-term care policies are indemnity-type policies, meaning they will pay (up to the policy's limits) for actual charges by the care provider. Some long-term care policies, instead of being based on indemnity, pay daily benefit amounts to the insured rather than paying for actual charges. The latter type of policy offers insureds greater flexibility, allowing them to pay for home care for example, and less paperwork.

In a long-term care policy, what is the elimination period?

This period constitutes the number of days the insured must wait after becoming eligible for benefits before coverage actually begins. The elimination period can range from zero to 90 days, or up to one year. The longer the elimination period, the lower the premium is.

How should I select a long-term care insurance provider?

Purchase long-term care insurance from a company that has an A+ or A++ rating from Best or an A, AA, or AAA rating from Standard and Poor's. Most public libraries have these references.

Should I comparison shop for long-term care insurance coverage?

Seek independent advice before buying. You might find such guidance from a financial advisor; an elder-law attorney; government-funded counseling and information services; or consumer organizations.

Use a local independent agent or broker who has been recommended by someone reliable. Don't buy from an agent who sells door-to-door.

Read the policy from cover to cover; don't rely on marketing literature.

Don't be pressured to buy the first policy you see. Compare it with at least two others.

Don't pay more than one month's premium when you apply for coverage. In most states, after you buy a policy, you have thirty days to change your mind and get a refund.

Is it worthwhile buying special types of health insurance?

You may receive solicitations in the mail for the following types of health insurance, or you may run across ads for them. They are to be avoided at all costs.

We realize that there are worthwhile policies out there that fall into the categories we talk about. But we bring your attention to these categories so that you will be wary of them, and will not buy without careful research.

Dread-Disease Insurance. This limited coverage insures against only one specific disease. Further, if you already have this disease (i.e., have been diagnosed) at the time you buy the policy, you're not covered.
Hospital Indemnity Insurance. "Indemnity" insurance means that the policy will pay (up to the policy's limits) for actual charges by the care provider, as opposed to paying daily benefit amounts to the insured regardless of actual charges. The typical "hospital indemnity" policy will provide a very small amount of coverage per day, and is not worth it.
Medical-Surgical Insurance. This type of coverage also provides limited payments, and only for specified procedures.
Insurance Sold Through the Mail and On Television. Many policies sold through television advertisements and mail solicitations have the following negative attributes: They tend to cover accidents but not illness; they start out with low premiums that later rise unreasonably; they deny claims more than other types of insurance; and they tend to exclude pre-existing conditions.

Do I need disability insurance? How can I ensure I have adequate coverage?

If you have dependents, you've probably made sure that you have adequate life insurance coverage. But what about disability coverage? Although the incidence of permanent or temporary disability during the average individual's prime earning years is fairly high, many people neglect to adequately insure against this risk.

Disability insurance generally provides you with an income stream in case you are unable to earn income due to illness or accident. Here are some questions that will get you started in making sure you have adequate coverage.

What does your employer provide? Find out what types (if any) of disability coverage are provided. If no coverage is provided, you may be able to purchase coverage through your employer.
Is the employer or state-provided coverage adequate? Find out how much you will receive under any existing coverage you have. If the amount you will receive is not enough to support your family during an illness or other disability, you may wish to supplement it.

If employer and government coverage is insufficient you should purchase a private disability policy.

Before you buy a disability policy, check out the following factors:
1. Make sure the policy can be renewed every year.
2. Make sure that if you are able to work part-time when disabled, you will still receive benefits.
3. Choose as policy with a three to six-month waiting period, since it will be less costly, and set aside an emergency fund to cover the waiting period.
4. Be sure the policy covers you until you reach age 65, at which time you can obtain full Social Security benefits.
5. Be sure the policy pays when you can't perform work in your own field.

Life Events

Buying or Leasing Your Next Car

Should I lease or buy my next car?

Will you save money leasing instead of buying? It depends on four things: (1) how good a deal you can strike with the dealership, (2) how many miles you put on a car, (3) how much wear and tear you put on a car, and (4) what the car will be used for.

To decide whether to lease or buy, compare the costs and other factors involved with both leasing and buying. Consider the following factors:

Your initial costs
Your ongoing costs
Your final costs and option rights
Whether you will be able to deduct any of the costs of the car because it will be used in a business
Whether having an ownership interest in the car is of overriding importance

How do I get the "best buy" when buying a new car?

First, decide on the size and type of car you want, and then decide what options you want (e.g., automatic, air conditioning, anti-lock brakes).

Second, find out what the car dealer is paying for the car(s) you're interested in. This is known as the dealer invoice cost. this is important because the difference between the invoice price and the sticker price is the amount that can be negotiated.

There are two different ways to go about getting this information. The first (and best) way is to use an auto pricing service provided by a consumer group or an auto magazine such as Consumer Reports New Car Price Service. This service gives you a complete run-down of the invoice price and the sticker price, adjusted for various options, as well as any rebates or factory incentives. And it tells you how to use the information in negotiating your new car's price. In addition, using an auto pricing service provides you with the most up-to-date information. The second way is to use pricing guides found on the Internet, such as Edmund's New Car Prices.

If you have a car to trade-in, you'll want to find out what it's worth, too. You can do this by looking up your used car in the N.A.D.A Official Used Car Guide, available online (www.nadaguides.com) or at the library.

The next step is to begin negotiating with car dealers. Now that you know the invoice price, use that information to bargain for the lowest possible markup over the dealer's cost.

Generally, $300 to $500 over the dealer's cost is a reasonable mark-up, unless the car you want is either hard to get or an extremely popular, exotic or sporty model.

Resist any attempts by dealerships to sell you undercoating, rust-proofing, or other extras. Depending on the repair history of your model, however, you might want to invest in the extended warranty.

How should I negotiate for a new car?

Remember that you are not only shopping for a car; you are choosing a dealer, with whom you will have a long-term relationship as you'll bring your car in for servicing. So if you don't like the dealership, go elsewhere.

As far as timing of purchase, the last Saturday of September, October, or December is generally a good time to get a good bargain on a car because sales managers are scrambling to meet their quotas for month and year-end.

Find out about financing alternatives before you begin shopping for a car. If you know what banks are charging, you will be prepared when the dealer talks about financing.

Here are some of the main points you'll want to get across during your negotiations:

You know the exact model you want, and which options you want.
You are comparison shopping, and will obtain price quotes from other dealers.
You will not discuss financing or trade-ins until the dealer has made you an offer (do not mention a trade-in until you have finished negotiating the price of your car).
You know how much the car cost the dealer.

Finally, even if you get what sounds like a good price, go to other dealers to get quotes.

Should I negotiate a car lease the same way as I purchase a car?

Similar to a loan, the monthly lease payment depends on the lease terms, the initial "purchase price" of the vehicle, and the interest rate. Unlike a loan, another important factor is the "lease-end" or "residual" value. This is the expected value of the car at the end of the lease term.

In a lease you are effectively paying for the difference between initial purchase price and residual value. You should negotiate the best possible (i.e. lowest) purchase price because this will lower your cost of leasing. If it is a closed-end lease and you do not intend to purchase the car at the end of the lease term, you should also try to negotiate a higher residual value.

If you walk into a dealership and ask to lease a car, they will often try to base the lease on the Manufacturer's Suggested Retail Price (MSRP). You would never pay this sticker price to purchase a car for cash, so you should not do so in a lease situation.

The first step is to negotiate the lowest possible price on the vehicle and then negotiate the lease terms. For example, assume a Lexus sedan has an MSRP of $36,955 (and the lease provides for a term of 36 months, an implicit interest rate of 6.67% and a residual value of $25,895). Based upon this MSRP, the monthly lease payment would be $481.50, excluding sales/use tax, licenses, etc.

The invoice (dealer) cost on the same vehicle is $32,469. If you negotiated a price between MSRP and invoice, say $34,750; the lease payment would be reduced to $416.00.

How does an auto lease work?

There are two types of lease arrangements: closed-end ("walk-away") and open-end (finance). Here's how they work:

Closed-End: The Dealer Bears the Risk of Depreciated Value

When a closed-end lease is up, you bring the car back to the dealership and "walk away." You must return the car with only normal wear and tear and with less than the mileage limit specified in your lease. Since the dealer is bearing the risk that the value of the car at the end of the lease will go down, your monthly payment is higher than with an open-end lease.

Open-End: You Bear the Risk of Depreciated Value

With the open-end lease the customer bears the risk that the car will have a certain value (called the "estimated residual value") at the end of the lease. The monthly payment is lower because of this risk.

When you return the car at the end of the lease, the dealer will have the car appraised. If the car's appraised value is at least equal to the estimated residual value in the agreement, you won't need to pay anything at the end of the lease term. Under some contracts, you can even receive a refund if the appraised value is higher than the residual value stated in the contract. If the appraised value is lower than the residual value, however, you may have to pay all or part of the difference.

What are the initial (up-front) costs of leasing a car?

In deciding whether to lease or buy, find out what your total initial costs will be. This is part of the total dollar amount you will arrive at to compare with the cost of buying.

"Initial costs" are the down payment you must come up with when you lease a car. They include the security deposit, the first and last lease payments, the "capitalized cost reductions," the sales taxes, title fees, license fees, and insurance. With a lease, the initial costs usually total less than the down payment needed to buy a car. Further, all initial costs are subject to negotiation during your bargaining with the dealer.

The Federal Consumer Leasing Act requires the Lessor to disclose all up-front, continuing and final costs in a standard, easy-to-read format.

What questions should I ask about a car lease?

Here is a list of questions you may want to ask the dealer before you enter into a car lease (you'll know some of the answers):

What kinds of leases are available and what are the differences? We explained the two main types of leases earlier, but dealers may have variations.
What are the initial costs of leasing the vehicle?
Are there any ongoing costs associated with leasing?
Does a trade-in decrease initial or ongoing costs?
What happens if I exceed the mileage specified in my lease?
How will my mileage allowance be enforced if I take an early termination or a purchase option?
Can I sublease if I fall behind in my payments or want to stop leasing?
What happens if I want to terminate my lease before the agreement is up?
Look for a "premature termination" clause, which provides for termination prior to the end of the lease term.
Look for a "premature termination" clause, which provides for termination prior to the end of the lease term.
What costs and charges can I expect to pay at the end of the lease?

Why is a security deposit required when I lease a car?

The Lessor is allowed to keep the security deposit if you owe money at the end of your lease or if you missed a monthly payment. The security deposit can also be used by the dealer to cover damage to the car or mileage in excess of the limit specified in the lease. If you do not owe any money on the lease at the end of the term, then your security deposit is returned to you.

How much can a dealer charge me at the end of an auto lease?

The Consumer Leasing Act (CLA) limits how much the dealer can collect at the end of the lease period. The CLA says dealers cannot collect more than three times the average monthly payment. However, the dealer can collect a higher amount in the following circumstances:

The vehicle has unreasonable wear and tear, or miles greater than specified in the lease
You agreed to pay a greater amount than specified in the original contract; or
The Lessor wins a lawsuit asking for a greater amount.

The dealer also has the option of selling the car at the end of the lease term. If the car is sold for less than the residual value stated in your leasing contract, you could be obligated to pay as much as three monthly payments to make up the difference.

Although dealers will generally not risk the goodwill of their customers and sell leased cars for less than the residual value just to move the car quickly, you may want to negotiate to include the right to approve the final sales price of the leased vehicle as part of your lease agreement.

Here are a few other things you should know:

If you stay under the mileage limit, you don't get a refund.
If you buy a car at the end of a closed-end lease and you go over your mileage allowance, you probably won't have to pay for excess mileage.

What ongoing lease items must the dealer disclose?

The Consumer Leasing Act requires dealers to disclose the total number of payments, the amount of each payment, the total amount of all payments, and the due date or schedule of payments. There is usually a penalty for late payment, which the Lessor must also disclose to you.

What about maintenance?

Maintenance is part of the lease and specifies whether the dealer assumes the maintenance expenses or the customer (you) assumes these expenses. If the dealer is to provide repair and maintenance, you will have to bring the car to the dealership in accordance with the manufacturer's suggested schedule in order to keep the warranty coverage. Even if you have to pay for repair and scheduled maintenance, you usually have to observe the manufacturer's scheduled maintenance in order not to jeopardize warranty coverage.

What are the typical final (lease-end) costs?

Final costs include:

Excess mileage charges

Mileage limitations usually occur with a closed-end lease. If you have gone over the allowable mileage at the end of your lease, you will have to pay a fee.

Consider carefully whether the mileage allowance is enough. Make some calculations of the miles you have driven per week, month, and year to find out whether the mileage allowance is sufficient.

Be aware that the low-mileage lease deals currently popular in certain areas offer mileage limits that are insufficient for many people. If you think you need more than the allowable mileage, negotiate a larger mileage allowance in your lease.

If you buy a car at the end of a closed-end lease and you go over your mileage allowance, you probably won't have to pay for excess mileage.

If you stay under the mileage limit, you don't get a refund.

With an open-end lease, although there is no penalty, if you exceed the mileage limit the appraisal value at the end of the lease term will usually be lower.

Default fees

These cover any payments or security deposits that the dealer does not receive from you and legal fees and costs the dealer incurs to repossess the car.

Excessive wear and tear charges

You'll have to pay charges for excessive wear and tear when you return the car at the end of the lease unless the contract reads otherwise. The dealer must tell you in writing the specific definition of excessive wear and tear. Generally, it means anything beyond normal usage (mechanical or physical).

Disposition charges

These are the costs of cleaning the car, giving it a tune-up, and doing final maintenance. If the agreement does not state otherwise, the dealer may pass these costs on to you.

What is a lease-purchase option?

Your lease may include the option to purchase the car at the end of the lease term. This option is usually found in open-end rather than closed-end leases. The dealer must tell you the estimated residual value of the car and the formula that will be used to determine your purchase price at the end of the lease.

If you think you might want to buy the car, be sure the purchase option is in your lease before you sign it; otherwise you'll have to renegotiate later, at which time you may have less bargaining power.

What is a lease early-termination option?

If you terminate your lease after, say, 36 months on a 48-month lease, you will have to pay an extra charge, based on the difference between the residual value of the car at that time and the estimated residual value at the end of the lease term (stated in the contract). The difference between these two may be great. In most lease agreements, you must keep the car at least 12 months. Before you sign the contract the dealer must tell you whether you can terminate early and what the cost is.

What is a "capitalized cost reduction"?

This is similar to a down payment. The dealer may ask you to put a certain amount of money down before leasing. The amount of the capitalized cost reduction varies with the business custom prevalent in the geographic area and the credit rating of the customer. The larger the down payment is, the smaller the monthly payment under the lease is; however, most people who want to lease instead of buy don't want to put down a large down payment, which is one of the major advantages of leasing.

Trading in your old car can reduce your down payment and/or your monthly payments.

Getting Married

Legal Rights: What are the major differences between married and unmarried couples?

When it comes to legal rights and being married vs. unmarried, there are several major issues to consider. Specifically, unmarried couples do not automatically:

Inherit each others' property. Married couples who do not have a will have their state intestacy laws to back them up; the surviving spouse will inherit at least a fraction of the deceased spouse's property under the law.
Have the right to speak for each other in a medical crisis. If your life partner loses consciousness or capacity, someone will have to make the decision whether to go ahead with a medical procedure. That person should be you. But unless you have taken care of some legal paperwork, you may not have the right to do so.
Have the right to manage each others' finances in a crisis. A husband and wife who have jointly owned assets will generally be affected less by this problem than an unmarried couple.

What estate and financial planning steps are particularly important for unmarried couples?

The following steps are particularly important for couples who are not married:

Prepare a will. If both partners make out wills, the chances are that the intentions expressed in the wills will be followed after one partner dies. If there are no wills, the unmarried surviving partner will probably be left high and dry.

Consider owning property jointly. Joint ownership of property with right of survivorship is a way of ensuring that property will pass to the other joint owner on one joint owner's death. Real property and personal property can be put into this form of ownership.

Prepare a durable power of attorney. Should you become incapacitated, the durable power of attorney will allow your partner to sign papers and checks for you and take care of other financial matters on his or her behalf.

Prepare a health care proxy. The health care proxy (sometimes called a "medical power of attorney") allows your partner to speak on your behalf when it comes to making decisions about medical care, should you become incapacitated.

Prepare a living will. A living will is the best way to let the medical community know what your wishes are regarding artificial feeding and other life-prolonging measures.

Do married couples need life insurance?

The purpose of life insurance is to provide a source of income for your children, dependents, or whoever you choose as a beneficiary, in case of your death. Therefore, married couples typically need more life insurance than their single counterparts. If you have a spouse, child, parent, or some other individual who depends on your income, then you probably need life insurance. Here are some typical families that need life insurance:

Families or single parents with young children or other dependents. The younger your children, the more insurance you need. If both spouses earn income, then both spouses should be insured, with insurance amounts proportionate to salary amounts. If the family cannot afford to ensure both wage earners, the primary wage earner should be insured first, and the secondary wage earner should be insured later on. A less expensive term policy might be used to fill an insurance gap. If one spouse does not work outside the home, insurance should be purchased to cover the absence of the services being provided by that spouse (child care, housekeeping, and bookkeeping). However, if funds are limited, insurance on the non-wage earner should be secondary to insurance on the life of the wage earner.

Adults with no children or other dependents. If your spouse could live comfortably without your income, then you will need less insurance than the people in situation (1). However, you will still need some life insurance. At a minimum, you will want to provide for burial expenses, for paying off whatever debts you have incurred, and for providing an orderly transition for the surviving spouse. If your spouse would undergo financial hardship without your income, or if you do not have adequate savings, you may need to purchase more insurance. The amount will depend on your salary level and that of your spouse, on the amount of savings you have, and on the amount of debt you both have.

Single adults with no dependents. You will need only enough insurance to cover burial expenses and debts, unless you want to use insurance for estate planning purposes.

Children. Children generally need only enough life insurance to pay burial expenses and medical debts. In some cases, a life insurance policy might be used as a long-term savings vehicle.

If one spouse changes their name after marriage, who should be notified?

You should notify all organizations with which you previously corresponded with your maiden name. The following is good list to start with:

The Social Security Administration
Driver's license bureau
Auto license bureau
Passport office
EmployerVoter's registration office
School alumni offices
Investment and bank accounts
Insurance agents
Retirement accounts
Credit cards and loans
Subscriptions
Club memberships
Post Office

Do I need to update my will when I get married?

Absolutely. Your will should be updated often, especially when such a significant life event occurs. Otherwise, your spouse and other intended beneficiaries may not get what you intended upon your death.

What are the tax implications of marriage?

Once you are married you are entitled to file a joint income tax return. While this simplifies the filing process, you may find your tax bill either higher or lower than if each of you had remained single. Where it's higher it's because when you file jointly more of your income is taxed in the higher tax brackets. This is frequently referred to as the "marriage tax penalty." Tax law changes in the form of marriage penalty relief were made permanent by the American Taxpayer Relief Act of 2012, and remained in place under the Tax Cuts and Jobs Act of 2017 with the exception of married taxpayers in the highest tax bracket.

You cannot avoid the marriage penalty by filing separate returns after you're married. In fact filing as "married filing separately" can actually increase your taxes. Consult your tax advisor if you have questions about the best filing status for your situation.

Under a joint IRS and U.S. Department of the Treasury ruling issued in 2013, same-sex couples, legally married in jurisdictions that recognize their marriages, are treated as married for federal tax purposes, including income and gift and estate taxes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage.

In addition, the ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming the earned income tax credit or child tax credit.

Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country is covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.

How can married couples hold property?

There are several ways of owning property after marriage, but keep in mind that they may vary from state to state. Here are the most common:

Sole Tenancy. Ownership by one individual. At death the property passes according to your will.

Joint Tenancy, with right of survivorship. Equal ownership by two or more people. At death, property passes to the joint owner's. This is an effective way of avoiding probate.

Tenancy in Common. Joint ownership of property without the right of survivorship. At death your share of the property passes according to your will.

Tenancy by the Entirety. Similar to Joint Tenancy, with right of survivorship. This is only available for spouses and prevents one spouse from disposing of the property without the others permission.

Community Property. In some states, referred to as community property states, married people own property, assets, and income jointly; that is, there is equal ownership of property acquired during a marriage. Community property states are AZ, CA, ID, LA, NV, NM, TX, WA, and WI.

Getting Divorced

How do I prepare financially for divorce?

If you are considering divorce, it's vital to plan for the dissolution of the financial partnership in your marriage. This means dividing the financial assets and liabilities you have accumulated during the years of marriage. Further, if children are involved, the future support given to the custodial parent must be planned for. The time you take to prepare and plan for eventualities will pay off later on.

Here is what you can do:

1. Make a list of all of your assets, joint or separate, including:

The current balance in all bank accounts
The value of any brokerage accounts
The value of investments, including any IRAs
Your residence(s)
Your autos
Your valuable antiques, jewelry, luxury items, collections, and furnishings

2. Make sure you have copies of the past two or three years' tax returns. These will come in handy later.

3. Inventory your financial debts and obligations. This helps you to prepare in two ways:

It will provide you with preliminary information for an eventual division of the property.
It will help you to plan how the debts incurred in the marriage are to be paid off. Although the best way of dealing with joint debt, such as credit card debt, is to get it all paid off before the divorce, often this is not possible. Having a list of your debts will help you to come to some agreement as to how they will be paid off.

4. Make sure you know the exact amounts of salary and other income earned by both yourself and your spouse.

5. Find any papers relating to insurance-life, health, auto, and homeowner's, as well as pension and other retirement benefits.

6. List all debts you both owe, separately or jointly. Include auto loans, mortgage, credit card debt, and any other liabilities.

If you are a spouse who has not worked outside the home lately, be sure to open a separate bank account in your own name and apply for a credit card in your own name. This will help you to establish credit after the divorce.

How should we handle credit card accounts during a divorce?

It is important to immediately cancel all joint accounts once you know you are going to obtain a divorce. Creditors have the right to seek payment from either party on a joint credit card or other credit account, no matter which party actually incurred the bill. If you allow your name to remain on joint accounts with your ex-spouse, you are also responsible for the bills.

Your divorce agreement may specify which one of you pays the bills. As far as the creditor is concerned, however, both you and your spouse remain responsible if the joint accounts remain open. The creditor will try to collect the bill from whoever it thinks may be able to pay, and at the same time report the late payments to the credit bureaus under both names. Your credit history could be damaged because of the cosigner's irresponsibility.

Some credit contracts require that you immediately pay the outstanding balance in full if you close an account. If so, try to get the creditor to have the balance transferred to separate accounts.

What do I do if my current or former spouse's poor credit affects me?

If your spouse's poor credit hurts your credit record, you may be able to separate yourself from your spouse's information on your credit report. The Equal Credit Opportunity Act requires a creditor to take into account any information showing that the credit history being considered does not reflect your own.

If for instance, you can show that accounts you shared with your spouse were opened by him or her before your marriage and that he or she paid the bills, you may be able to convince the creditor that the harmful information relates to your spouse's credit record, not yours. In practice, it is difficult to prove that the credit history under consideration doesn't reflect your own, and you may have to be persistent.

What happens to my credit history after a divorce?

If a woman divorces and changes her name on an account, lenders may review her application or credit file to see whether her qualifications alone meet their credit standards. They may ask her to reapply, but generally the account remains open.

Maintaining credit in your own name avoids this inconvenience. It can also make it easier to preserve your own, separate, credit history. Furthermore, should you need credit in an emergency, it will be available.

Do not use only your husband's name, for example, Mrs. John Wilson for credit purposes.

Check your credit report if you haven't done so recently. Make sure the accounts you share are being reported in your name as well as your spouse's. If not, and you want to use your spouse's credit history to build your own, write to the creditor and request the account be reported in both names. If there is any inaccurate or incomplete information in your file write to the credit bureau and ask them to correct it. The credit bureau must confirm the data within a reasonable time period, and let you know when they have corrected the mistake.

If you have been sharing your husband's accounts, building a credit history in your name should be fairly easy. Contact a major credit bureau and request a copy of your file, then contact the issuers of the cards you share with your husband and ask them to report the accounts in your name as well.

What are the legal issues that must be faced in most divorces?

The best way to plan for the legal issues that must be faced in a divorce such as child custody, division of property, and alimony or support payments, is to come to an agreement with your spouse. If you can do this, the time and money you will have to expend in coming up with a legal solution -- either one worked out between the two attorneys or one worked out by a court -- will be drastically reduced.

Here are some general tips for handling the legal aspects of a divorce:

Get your own attorney if there are significant issues dealing with assets, child custody, or alimony.
There are several ways to find a good matrimonial attorney including referrals from other professionals, referrals from trusted friends, or lists obtained from the American Academy of Matrimonial Lawyers.
Make sure the divorce decree or agreement covers all types of insurance coverage-life, health, and auto.
Be sure to change the beneficiaries on life insurance policies, IRA accounts, 401(k) plans, other retirement accounts, and pension plans.
Don't forget to update your will.

Those who have trouble arriving at an equitable agreement, but do not require the services of an attorney, might consider the use of a divorce mediator. This type of professional advertises in the section of the classifieds titled "Divorce Assistance", or "Lawyer Alternatives."

How does property get divided in a divorce?

The laws governing the division of property between ex-spouses vary from state to state. You should also be aware that matrimonial judges have a great deal of latitude in applying those laws as well.

Here is a list of items you should be sure to take care of, regardless of whether you are represented by an attorney:

Gain an understanding of how your state's laws on property division work.
If you owned property separately during the marriage, be sure you have the papers to prove that it's been kept separate.
Be ready to document any non-financial contributions to the marriage, e.g., your support of a spouse while he or she attended school or your non-financial contributions to his or her financial success.
If you need alimony or child support, be ready to document your need for it.

If you have not worked outside the home during the marriage consider having the divorce decree provide for money for you to be trained or educated.

What are the tax implications of divorce?

After divorce each individual will file their own tax return. However, there are several areas where transactions between former spouses can result in tax consequences. The most common areas are:

Child Support

Child support is not deductible by the payer and is not taxable to the recipient. A payment is considered to be child support if it is specifically designated as such in a divorce or separation agreement or if it is reduced by the occurrence of a contingency related to the child (such as attaining a certain age).

Alimony

Alimony is a payment made pursuant to a divorce decree other than child support or designated as something in the instrument as other than alimony. Similar treatment is accorded separate maintenance payments made pursuant to a separation agreement. In order to qualify, payments must also cease upon the death of the recipient and must not be front-loaded.

Starting in 2019, alimony as well as separate maintenance payments were repealed by the Tax Cuts and Jobs Act of 2017 and are no longer deductible by the payer spouse.

For tax year 2018 and those years preceding it, alimony is deductible by the payer and is taxable to the recipient.

Property Settlements

Property settlements are not taxable events when pursuant to divorce or separation. Transfers of assets between spouses in this event do not result in taxable income, deductions, gains or losses. The cost basis of the property carries over to the recipient spouse. Be careful in a divorce, your spouse may give you an equal share of property based upon fair market value, but with the lower basis. This can result in a higher taxable gain upon a sale of the asset.

What happens when retirement plans or IRAs are divided up in a divorce?

Generally, when these plans are split up there is no taxable event if pursuant to a qualified domestic relations order or other court order in the case of an IRA. This is true, however, only if the assets remain in a retirement account or IRA. Once funds are distributed they will be taxed to the recipient. At the time of division, the payer does not receive a deduction and the recipient does not have taxable income.

Can I deduct the cost of getting a divorce?

Generally, no; however, fees paid specifically for income or estate tax advice pursuant to a divorce may be deductible. Also, fees made to determine the amount of alimony or to collect alimony can be deducted. These deductions would be miscellaneous itemized deductions subject to the two percent limitation.

For tax years 2018 through 2025, miscellaneous itemized deductions (Form 1040, Schedule A) have been eliminated due to tax reform (Tax Cuts and Jobs Act of 2017).

Who is entitled to deduct the dependency exemption of a child after divorce?

Generally, the custodial parent is entitled to the deduction. However, this is often negotiated in the divorce settlement. If the parents agree in writing, the non-custodial parent can take the deduction.

For tax years 2018 through 2025, the personal exemption as well as dependent exemptions is eliminated due to tax reform (Tax Cuts and Jobs Act of 2017). However, the dependent exemption deduction for noncustodial parents still exists for 2018-2025 (that is, it was not repealed) but is reduced to $0.

Death of a Loved One

What papers will I need if a family member dies?

Here is a list of the papers that you will probably need:

Certified copies of the death certificate (at least 10). You can purchase them through the funeral director or directly from the County Health Department.
Copies of all insurance policies, which may be located in the deceased's safe deposit box or among his or her personal belongings.
Social Security numbers of the deceased, the spouse, and any dependent children.
Military discharge papers, if the deceased was a veteran. If you cannot find a copy, write to The Department of Defense, National Personnel Record Center, 1 Archives Drive, St. Louis, MO 63138.
Marriage Certificate, if the spouse of the deceased will be applying for benefits. Copies of marriage certificates are available at the Office of the County Clerk where the marriage license was issued.
Birth Certificates of dependent children. Copies are available at either the State or the County Public Health offices where the child was born.
The Will, which may be with the deceased's lawyer.
A complete list of all property including real estate, stocks, bonds, savings accounts and personal property of the deceased.
If the death is not unexpected, you should try to gather these papers in advance (other than the death certificate, of course) to lessen the strain at the time of death.

What steps should I take regarding the deceased's assets?

You should check with your financial advisor as to how you should handle the following assets of the deceased, but some general rules of thumb include:

Insurance Policies. You may need to change the beneficiaries of policies held by the spouse of the deceased. Moreover, if the spouse does not have any dependents, it might be wise to reduce the amount of life insurance coverage. Auto and home insurance may also need revision.
Automobiles. Check with your State DMV to see if the title of the deceased's car needs to be changed.
Bank Accounts. If the deceased and his or her spouse had a joint bank account, title will automatically pass to the surviving spouse. Notify the bank to change its records to reflect this change in ownership. If a bank account was held only in the name of the deceased, that asset will have to go through probate (unless it's a trust account).
Stocks and Bonds. To change title to stocks or bonds, check with the deceased's broker.
Safe Deposit Box. In most states, you will need a court order to open a safe deposit box that is rented only the name of the deceased.
In most states, only the will and other materials pertaining to the death can be removed before the will has been probated.
Credit Cards. Any credit cards exclusively in the name of the deceased should be canceled (and any payments due should be paid by the estate). As to credit cards in the names of both the deceased and his or her spouse, the surviving spouse should notify the credit card companies of the death and ask that the card should be reissued in the survivor's name only.

You should update your own will if it provides that any of your property will pass to the deceased upon your death.

How can I avoid overpaying for the funeral of a family member?

The best way to avoid overpaying for a funeral is to plan ahead. Further, it pays to know about the "Funeral Rule," the regulation of the Federal Trade Commission (FTC) concerning funeral industry practices. The Funeral Rule provides that:

The funeral provider must give you, over the phone, price and other readily available information that reasonably answers your questions.
The funeral provider must give you (1) a general price list, (2) a disclosure of your important legal rights, and (3) information about embalming, caskets for cremation, and required purchases.
The funeral provider must disclose in writing any service fees for paying for goods or services on your behalf (such as flowers, obituary notices, pallbearers, and clergy honoraria). While some funeral providers charge you only their cost for these items, others add a service fee to their cost. The funeral provider must also inform you of any refunds, discounts, or rebates from the supplier of any such item.
The funeral provider must disclose in writing your right to buy, and make available to you, an unfinished wood box (a type of casket) or an alternative container for direct cremation.
You do not have to purchase unwanted goods or services or pay any fees as a condition to obtain those products and services you do want. In addition to the fee for the services of the funeral director and staff, you need to pay only for those goods and services selected by you or required by state law.
The funeral provider must give you an itemized statement of the total cost of the funeral goods and services you selected; this statement must disclose any legal, cemetery, or crematory requirements for you to purchase any specific funeral goods or services.
The funeral provider is prohibited from telling you that a particular funeral item or service can indefinitely preserve the body of the deceased in the grave or claiming that funeral goods such as caskets or vaults will keep out water, dirt, or other gravesite substances.

If you have a problem concerning funeral matters, and cannot resolve it with the funeral director, contact your federal, state, or local consumer protection agencies, the Funeral Consumers Alliance, or the International Conference of Funeral Examining Boards.

What Social Security benefits are surviving family members entitled to?

The deceased is considered covered by Social Security if he or she paid into Social Security for at least 40 quarters. Check with your local Social Security office or call 800-772-1213 to determine if the deceased was eligible. If the deceased was eligible, there are two types of possible benefits.

One-Time Death Benefit

Social Security pays a death benefit toward burial expenses. Complete the necessary form at your local Social Security office, or ask the funeral director to complete the application and apply the payment directly to the funeral bill. This payment is made only to eligible spouses or to a child entitled to survivors benefits.

Survivors Benefits for a Spouse or Children.

If the spouse is age 60 or older, he or she will be eligible for benefits. The amount of the benefit received before age 65 will be less than the benefit due at age 65 or over. Disabled widows age 50 or older are eligible for benefits. The spouse of the deceased who is under the age of 60 but who cares for dependent children under the age of 16 or cares for disabled children may be eligible for benefits. The children of the deceased who are under the age of 18 or are disabled may also be entitled to benefits.

What is probate?

Probate is the legal process of paying the deceased's debts and distributing the estate to the rightful heirs. This process usually entails:

The appointment of an individual by the court to act as "personal representative" or "executor" of the estate. This person is often named in the will. If there is no will, the court appoints a personal representative, usually the spouse.
Proving that the will is valid.
Informing creditors, heirs, and beneficiaries that the will is probated.
Disposing of the estate by the personal representative in accordance with the will or state law.

The spouse or personal representative named in the will must file a petition with the court after the death. There is a fee for the probate process.

Depending on the size and complexity of the probable assets, probating a will may require legal assistance.

Assets that are jointly owned by the deceased and someone else are not subject to probate. Proceeds from a life insurance policy or Individual Retirement Account (IRA) that are paid directly to a beneficiary are also not subject to probate.

What taxes are due upon the death of a family member?

Here is a summary of the various taxes that may have to be paid on the death of a family member:

Federal Estate Tax. Amounts passing to a surviving spouse, and amounts passing to charity, are generally exempt from estate tax. Estate tax is generally only due on estates which, after reduction for what goes to spouse and charity, exceed the unified credit exemption equivalent, which in 2023 is $12,920,000 ($12,060,000 in 2022).

Contact the IRS for a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, if you need to file an estate tax return. A federal estate tax return must be filed and taxes paid within nine months of the date of death absent extension.

State Estate and Inheritance Taxes. State laws vary. Many states impose estate taxes, which may apply in addition to federal estate taxes, or may apply even when federal estate taxes don't. Some states impose inheritance taxes on individuals who receive inheritances, rather than on the estate.

Income Taxes. The federal and state income taxes of the deceased are due for the year of death. The taxes are due on the normal filing date of the following year unless an extension is requested. The spouse of the deceased may file a joint federal income tax return for the year of death. A spouse with a dependent child may file jointly for two additional years. IRS Publication 559, Survivors, Executors, and Administrators, may be helpful.

Can I refuse to accept property bequeathed to me by a family member so as to cut taxes?

The disclaimer or generation-skipping transfer tax is a way for you to refuse all or part of property that would otherwise pass to you, via will, intestacy laws, or by operation of law. An effective disclaimer passes the property to the next beneficiary in line.

The fact that the property is treated as if it had passed directly from the decedent to the next-in-line beneficiary may save thousands of dollars in estate taxes. The provision for a disclaimer in a will and the wise use of a disclaimer allows intra-family asset shifting and income shifting for maximal use of the estate tax marital deduction, the unified credit, and the lower income tax brackets.

Disclaimers can also be used to provide for financial contingencies. For example, you can disclaim an interest if someone else is in need of the funds.

Can I file a joint return for the year my spouse dies?

Yes, the surviving spouse can elect to file a joint return provided they did not remarry prior to the end of the tax year.

Must I pay taxes on the proceeds of a life insurance policy payable to me?

Generally, no. Proceeds of life insurance policies are not taxable income unless the recipient paid for the right to receive them. For example, if you purchased a policy as an investment.

If I receive distributions from a retirement plan or an IRA of the deceased, must I pay income taxes on the distribution?

Generally, yes. This is known as income in respect of a decedent. Since the deceased has not paid income tax on the distribution, the tax is owed by the recipient. If the value of the account was included in the decedent's estate tax return, you may be entitled to a deduction for a portion of the estate taxes paid.

How will my spouse's assets be distributed if he/she died without a will?

Assets held jointly with right of survivorship will transfer by law to the joint holder. Insurance policies or retirement accounts with a designated beneficiary will go to that beneficiary. Assets owned solely by the decedent will transfer according to state law. This is known as intestacy. These laws vary by state, but generally, give preference to the spouse and children.

Other Situations

How Can I Resolve A Consumer Complaint?

First, go to the seller of the item. Second, contact the relevant consumer agency. Finally, if neither of these results in satisfaction, you can file a lawsuit or use arbitration.

Contacting the Seller

Before you take your complaint to the store or other entity that sold you the service or product:

Gather any evidence you may need, such as the receipt, a canceled check, photographs showing the problem, a warranty, a contract, or a bill of sale.
Figure out what your goal is. Do you want the product replaced? Do you want your money back? Do you merely want an apology?
Call the store or service provider and ask to make an appointment with the manager, customer service representative, or another appropriate person. Meet face to face with that individual and explain as succinctly as possible the nature of the problem and what you want to be done about it. If you talk on the phone, follow up with a letter, and make notes of the dates of your calls and to whom you spoke.

If the product is covered by a warranty, it's usually better to follow up with the manufacturer instead of the merchant.
If this doesn't produce results, take your problem to a higher authority. This might be a supervisor or a corporate president. You should put your complaint in writing at this point if you haven't already done so. Your letter should include your name, address, phone numbers, and account number (if relevant). If a product is involved, include the date and place of purchase, and the model and serial number. Briefly, state the problem with the product or service, and write about what you have done so far to resolve it. Finally, tell the letter recipient what you want done, and give him or her a deadline. Include copies of relevant documents (not originals), and keep a copy of your letter. Keep copies of anything you receive from the company.

Contacting an Agency
If you still haven't achieved the result you wanted, look in the phone book for a consumer complaint agency, such as the state, county, or city consumer protection office, or the Better Business Bureau.

Or, you might want to go the trade association route. Some industry trade associations offer help in mediating disputes concerning their members.

If your complaint involves a bank, you might wish to contact the appropriate state banking regulator. Similarly, you might want to contact the state insurance regulator if an insurer is involved, the securities regulator for a securities problem, or the public utility commission for utility-related problems.

If the problem involves a state-licensed trade (e.g., a general contractor or a plumber), call the state licensing department.

If you bought a "lemon" used car, investigate your state's lemon laws by contacting your state consumer protection agency.

If the problem involves mail order or mail fraud, contact your area postal inspector, who can be found in the U.S. government section of the phone book.

There may also be a local television news program hotline for resolving consumer complaints.

Call the agency first to find out what procedures it wants you to follow.

Filing a Lawsuit
When all else fails, you might want to file a court case--either a small claims case, if the amount of money involved is small enough (generally, under $5,000)--or a regular lawsuit. More often than not, simply contacting an attorney and having him or her write a letter to the merchant or service provider indicating that you intend to file a lawsuit will get you the result you are seeking. If a small claims case is involved, you generally won't need to hire an attorney, but if the case doesn't qualify for small claims, you'll probably need to hire an attorney.

How Can I Reduce My Bank Fees?

There are many ways to reduce your bank fees. Here are a few of them:

Are there fees associated with your checking account? If so, then call your bank and find out what you can do to get free checking and free ATM usage. For example, you might need to keep a minimum balance in the account and use only ATMs at your own bank. You may want to ditch banks altogether and join a credit union, which typically charges less for banking services.
Don't keep too much money in a low-interest savings account. Find out how much money you'll need access to in an emergency (generally three to six months' worth of expenses) and keep only that amount in your savings account. The rest of your funds should be invested in the stocks and mutual funds or in the high-interest rate CD (Certificate of Deposit) you can find (check out Bankrate.com).
If you still write checks don't order them through your bank. Many check printers charge less for check orders than the printers used by banks.

How Can I Save On My Insurance Costs?

Here are some ways to save on insurance of all types:

Shop around for a life insurance policy. It pays to check prices on life insurance policies periodically because rates change frequently. Also, if you've quit smoking, you may be entitled to better rates after a few years.
Take a look at your life insurance needs to see whether you even need a policy or are paying for too much coverage.
Insure your home and autos with the same insurer. You may be able to get a break by doing this.
Shop for auto insurance to try to get a lower rate.
Install smoke detectors, burglar alarms, and sprinkler systems to save on homeowner's insurance. Don't forget to ask your insurance agent about other cost saving measures.
Get rid of private mortgage insurance. Once you have enough equity in the home, ask your lender to cancel your private mortgage insurance.

How Can I Cut My Utility Costs?

Here are some thoughts to keep in mind when trying to cut utility costs:

Your utility company or state may have a program that subsidizes making your home more energy-efficient. If not, there's plenty of information out there about making your home more energy efficient such as caulking your windows and making sure your insulation's "R" factor is correct for your location.
Install CFLs (compact fluorescent lights) or LEDs (light-emitting diodes) instead of incandescent bulbs to save energy and money.
Keep the thermostat at the lowest temperature comfortable in winter and the highest temperature comfortable in summer.

How Can I Reduce The Cost Of My Phone Bill?

Today's cost-cutting competition among land-line and mobile phone service providers offers a few opportunities for savings on your phone bills, such as:

Shopping around to make sure you're paying as little as possible for long-distance and mobile phone charges. Take the time to investigate which service provider will save you the most and switch if it is a better deal.
Consider getting rid of your land-line phone altogether.
Use e-mail or Skype to correspond with relatives and friends.

How Can I Reduce The Cost Of My Mortgage?

Consider the following options to help you reduce the cost of your mortgage:

Paying down your mortgage. For most people, paying down a mortgage is an effective way of saving and increasing net worth. Decide that you will pay $100 or $200 per month-or more-in mortgage principal, and do it faithfully.
Refinancing your mortgage. You may be able to save money by refinancing your mortgage., but you need to go through the calculations and see whether the reduction in your monthly payments would be worth the costs involved with refinancing. The general rule is that a reduction of at least two points will make it worthwhile to refinance if you intend to stay in the house for at least five years.

Credit

Credit Cards

Which are the best credit cards?

Finding the best credit card is mostly a matter of comparison shopping, but before you accept a credit card offer, make sure you understand the card's credit terms. For instance, what is the annual percentage rate? Is there a grace period? How much is the annual fee? Once you have the answers to these and other answers, then you can compare several cards at once and figure out which card meets your particular needs and which one offers you a better deal.

Figuring out which card is best for you is not always obvious because it really depends on how you plan to use the card. For example, if you plan to pay your bills in full each month, fees and the length of the grace period may be more important than the periodic and annual percentage rate. If you anticipate using your credit cards to pay for purchases over a period of time, then the annual percentage rate (APR) and the balance computation method are important terms to consider. In either case, keep in mind that your costs will be affected by whether or not there is a grace period.

When it comes to shopping around for a credit card there are a few terms you should know and understand. These include:

Annual percentage rate. The annual percentage rate or APR is a measure of the cost of credit expressed as a yearly rate.

Periodic rate. The card issuer also must disclose the periodic rate applied to your outstanding account balance to figure the finance charge for each billing period.

Variable rate. If the credit card you are considering has a variable rate feature, the card issuer must tell you that the rate may vary and how the rate is determined. You also must be told how much and how often your rate may change.

Grace period. The grace period allows you to avoid the finance charge by paying your current balance in full before the due date shown on your statement. Knowing whether a credit card plan gives you a grace period is especially important if you plan to pay your account in full each month. And, thanks to the Credit CARD Act of 2009, if the credit card has a grace period finance charges for the month cannot be assessed unless you receive the monthly statement 21 days before the financing charges begin.

If there is no grace period, the card issuer will impose a finance charge from the date you use your credit card or from the date each transaction is posted to your account.

Annual membership. Most credit card issuers used to charge annual membership fees, but this is no longer the case. There are plenty of cards out there with no annual or other participation fees. For those card issuers that do impose annual fees, they typically range from $18 to $95. The annual fee for an American Express Platinum Card is $450.

Other costs. A credit card also may involve other types of costs such as balance transfer fees and fees for cash advances, or late fees.

If someone steals my credit card, how much am I liable for?

Under the Truth in Lending Act, if your credit card is used without your authorization, you are only held liable for up to $50 per card. If you report the loss before the card is used, federal law says the card issuer cannot hold you responsible for any unauthorized charges.

If a thief uses your card before you report it missing, the most you will owe for unauthorized charges is $50. This is true even if a thief is able to use your credit card at an automated teller machine (ATM) to access your credit card account.

To minimize your liability, report the loss of your card as soon as possible. Most companies have toll-free numbers printed on their statements and 24-hour service to report lost or stolen cards.

Are rebate and rewards credit cards a good deal?

The use of rebate and rewards cards has grown rapidly. Costco for example sponsors a credit card (Costco Cash Rebate card) that give rebates on the cost of merchandise you buy with the card once you spend a certain amount. You usually get larger rebates on the sponsoring company's products and lower rebates on other card charges. Credit card solicitations promise cash, frequent-flier miles or points that will buy everything from hotel rooms to gas.

You'll get a good deal from a rebate card if you spend a lot, and if you pay your bill in full each month. If you carry a balance on the card, what you gain in rebates you will lose in the excessive interest charged by credit cards.

What is the difference between the average daily balance, adjusted balance and previous balance?

Average Daily Balance (including or excluding new purchases). The average daily balance method gives you credit for your payment from the day the card issuer receives it. To compute the balance due, the card issuer totals the beginning balance for each day in the billing period and deducts any payments credited to your account that day. New purchases may or may not be added to the balance, depending on the plan, but cash advances typically are added. The resulting daily balances are added up for the billing cycle and the total is then divided by the number of days in the billing period to arrive at the "average daily balance." This is the most common method used by credit card issuers.

Adjusted Balance. This balance is computed by subtracting the payments you made and any credits you received during the present billing period from the balance you owed at the end of the previous billing period. New purchases that you made during the billing period are not included. Under the adjusted balance method, you have until the end of the billing cycle to pay part of your balance and you avoid the interest charges on that portion. Some creditors exclude prior, unpaid finance charges from the previous balance. The adjusted balance method usually is the most advantageous to card users.

Previous Balance. As the name suggests, this balance is simply the amount you owed at the end of the previous billing period. Payments, credits, or new purchases made during the current billing period are not taken into account. Some creditors also exclude unpaid finance charges in computing this balance.

What can I do if I am dissatisfied with a credit card purchase?

If you have a problem with merchandise or services that you charged to a credit card, and you have made a good faith effort to work out the problem with the seller, you have the right to withhold from the card issuer payment for the merchandise or services. Check with your credit card company regarding their policies.

If you do not achieve satisfaction through the seller or credit card company, you can file a small claims court action-an informal legal proceeding that can be used to settle disputes. Check your local telephone book under your municipal, county, or state government headings for small claims court listings.

In addition, you have the following rights:

You have the right to have mail and phone order purchases shipped when promised, or to cancel for a full and prompt refund. If no shipping date is stated, your right to cancel begins 30 days after your order and payment are received by the merchant. If you cancel, the seller has one billing cycle to tell the card issuer to credit your account.

There are two exceptions to the 30-day shipment rule: (1) If a company doesn't promise a shipping time, and you are applying for credit to pay for your purchase, the company has 50 days after receiving your order to ship. (2) Spaced deliveries, such as magazine subscriptions (except for the first shipment); items that continue until you cancel (e.g. book or record clubs, etc.); C.O.D. (cash on delivery) orders; services; and seeds or growing plants are not covered.

You have the right to a full refund--because of shipping delay--within seven working days (or one billing cycle) after the seller receives your request to cancel.

You may refuse a delivery of damaged or spoiled items.

If there is obvious damage to a package you receive in the mail, and if you decide not to accept the package, write "REFUSED" on the wrapper (at time of delivery) and return it unopened to the seller. No new postage is needed, unless the package came by insured, registered, certified or C.O.D. mail and you signed for it.

If you are ordering something to be delivered by C.O.D., make your check out to the seller, not the post office. That way, you may contact your bank and stop the check if there is an immediate problem with merchandise.

When you return merchandise or pay more than you owe, you have the option of keeping the credit balance on your account or requesting a refund (if the amount exceeds $1.00). To obtain a refund, write the card issuer. The card issuer must send you the refund within seven business days of receiving your request.

What can I do if there is a mistake on my credit card bill?

The Fair Credit Billing Act provides specific rules that the card issuer must follow for promptly correcting billing errors. The card issuer will give you a statement describing these rules when you open the credit card account and, after that, at least once a year. Many card issuers print a summary of your rights on each bill they send you.

Billing errors include:

a charge for something you didn't buy
a purchase by someone not authorized to use your card
an amount on your bill that is different from the actual amount you paid
a charge for something that you did not accept on delivery
a charge for something that was not delivered according to the agreement
arithmetic errors
payments not credited to your account

When you find an error you must notify the card issuer in writing within 60 days after the first bill containing the error was mailed to you. Some companies may accept e-mail; others will require that you put your dispute in writing. Be sure to include your name and account number, a description of the billing error and the date and amount of the charge you dispute.

The card issuer, in turn, must look into the problem and either correct the error or explain to you why the bill is correct. If there is an error, you will not have to pay interest charges on the disputed amount. Your account must be corrected. If there is no error, the credit card company must send you an explanation and a statement of what you owe.

During the period that the card issuer is investigating the error, you do not have to pay the amount in question. For further information visit Consumer Information.

How can I get the most benefit from my credit cards?

Here are some suggestions for the use of credit cards:

Pay bills promptly to keep finance charges as low as possible.
Keep copies of sales slips and promptly compare charges when your bills arrive
Keep a list of your credit card account numbers and the telephone numbers of each card issuer in a safe place in case your cards are lost or stolen.
Protect your credit cards and account numbers to prevent unauthorized use.

Draw a line through blank spaces above the total when you sign receipts. Rip up or retain carbons.
Deal only with reliable firms. Check with your local consumer protection agency or the Better Business Bureau (BBB) closest to where the business is located. Study the advertising offer carefully and always ask the company about its refund and exchange policies as well as product warranties offered.

Pay by money order, check, charge or credit card so you have a record of your purchase.
Never send cash. Keep the ad you responded to and a copy of the order form. If there is no order form, make your own notes with the company's name, address, phone number, date, amount, the item you purchased, and any delivery date that may have been promised.
Never give out your credit, debit, charge card or bank account numbers unless you've checked out the company or have done business with it before.

What restrictions and limitations can a merchant impose before accepting my credit card?

Some merchant practices violate your privacy and expose you to potential credit fraud, and are therefore illegal in many states.

To protect your privacy, say "no" to a merchant who engages in these impermissible credit card practices:

Writes your credit card number on your personal check
Writes your personal information on a bank credit card sales slip
Imposes a minimum sales amount for credit card purchases
Charges extra for payment by credit card.

Giving a discount for cash payments is allowed.

How can I stop junk mail or telemarketing calls?

You have the right to tell commercial telephone and direct mail marketers to stop calling you. If you wish to have your name removed from telephone lists of marketing companies contact the federal Do Not Call Registry:

National Do Not Call Registry

Federal Trade Commission

600 Pennsylvania Avenue, NW

Washington, DC 20580

website: www.donotcall.gov

Consumers who do not wish to receive promotional mail at home should contact:

Direct Marketing Association

1120 Avenue of the Americas

NY, NY New York, NY 10036-6700

Tel. 212.768.7277

website: www.DMAChoice.org

If companies you now do business with also removes your name, you can contact them directly to have your name reinstated. If the marketer violates the do-not-call list, the first step is to file a complaint with the FTC (Federal Trade Commission). You can also file a lawsuit against the telemarketer, but only if there is a "pattern and practice" of violations. You also have to have suffered actual damages of more than $50,000 and be able to prove both of these things.

If you receive unordered merchandise in the mail, consider it a gift and don't feel pressure to pay for it.

Credit Reports

How can I check my credit report?

Mistakes on credit reports occur more frequently than you might think. And whether those mistakes are there because they're caused by stolen or unauthorized use of credit cards, other individuals with the same name, or a creditor reporting something in the wrong way, it's important to check your credit report on a regular basis.

By law, and at your request, you are entitled to one free credit report from each of the three major credit bureaus listed below once every 12 months. To check your report or obtain a copy do not contact the three nationwide consumer reporting companies individually. Instead, visit www.annualcreditreport.com, call 1-877-322-8228, or complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. The form is available at Free Credit Reports on the Federal Trade Commission website (ftc.gov).

AnnualCreditReport.com is a centralized service for consumers to request free annual credit reports. You may order your reports from each of the three nationwide consumer reporting companies at the same time, or you can order one report at a time from each of the three companies.

In addition, federal law states that you're entitled to a free report if a company takes adverse action against you, such as denying your application for credit, insurance, or employment, but you must submit a request for your report within 60 days of receiving notice of the action. The notice will give you the name, address, and phone number of the consumer reporting company.

You're also entitled to one free report a year if you're unemployed and plan to look for a job within 60 days; if you're on welfare; or if your report is inaccurate because of fraud, including identity theft. Otherwise, a consumer reporting company may charge you up to $11.00 for another copy of your report within a 12-month period. Residents of California, Colorado, Connecticut, Georgia, Maine, Maryland, Massachusetts, Minnesota, Montana, New Jersey, Puerto Rico, Vermont, or the US Virgin Islands, may be entitled to a free or reduced price personal credit report from each of the three major credit bureaus, which are listed below:

Experian Credit Bureau: 888-397-3742
Equifax Credit Bureau: 866-349-5191
TransUnion: 877-322-8228

What if there is an error on my credit report?

By law (under the Fair Credit Reporting Act) you have the right to correct inaccurate information in your credit file. You must dispute your report directly to the credit reporting agency.

Notify the credit reporting company, in writing, what information you think is inaccurate. Include copies (do not send originals) of documents that support your position. Provide your complete name and address and clearly identify each item in your report you dispute and state the facts and explain why you dispute the information. You must also request that the item is removed or corrected.

Credit reporting companies must investigate the items in question ”usually within 30 days” unless they consider your dispute frivolous. They also must forward all the relevant data you provide about the inaccuracy to the organization that provided the information. After the information provider receives notice of a dispute from the credit reporting company, it must investigate, review the relevant information, and report the results back to the credit reporting company. If the information provider finds the disputed information is inaccurate, it must notify all three nationwide credit reporting companies so they can correct the information in your file.

Send your dispute by certified mail, return receipt requested, and keep copies of your dispute letter and enclosures. By doing so, you can document what the credit reporting agency received.

When the investigation is complete, the credit reporting company must give you the results in writing and a free copy of your report if the dispute results in a change. This free report does not count as your annual free report. If an item is changed or deleted, the credit reporting company cannot put the disputed information back in your file unless the information provider verifies that it is accurate and complete. The credit reporting company also must send you written notice that includes the name, address, and phone number of the information provider.

If you request it, the credit reporting company must send notices of any corrections to anyone who received your report in the past six months. You can have a corrected copy of your report sent to anyone who received a copy during the past two years for employment purposes.

If an investigation doesn't resolve your dispute with the credit reporting company, you can ask that a statement of the dispute be included in your file and in future reports. You also can ask the credit reporting company to provide your statement to anyone who received a copy of your report in the recent past. You can expect to pay a fee for this service.

While the investigation is going on, be sure to tell the creditor or another information provider, in writing, that you dispute an item. Be sure to include copies (NOT originals) of documents that support your position. Many providers specify an address for disputes. If the provider reports the item to a credit reporting company, it must include a notice of your dispute. And if you are correct - that is, if the information is found to be inaccurate - the information provider may not report it again.

If you are divorced and suffering the consequences of a credit rating damaged during the marriage, you may be able to obtain relief if the bad credit rating was your spouse's fault and you can prove it. According to the Equal Credit Opportunity Act, a lender must consider any evidence you have that shows your spouse---not you---was the irresponsible one.

How can I build a credit history so that I can establish credit?

It may take some time to establish your first credit account if you have no reported credit history. This problem affects mainly (1) young people, (2) older people who have never used credit, and (3) divorced or widowed women who shared credit accounts reported only in the husband's name.

Here are some steps you can take:

Check with a credit bureau to find out what is in your credit report.

If you have had credit before under a different name or in a different location and it is not reported in your file, ask the credit bureau to include it. Although credit bureaus are not required to add new accounts to your file, many will do so for a fee.

If you currently share a credit account with your spouse, ask the creditor to report it under both names
When contacting your creditor or credit bureau, do so in writing and include relevant information, such as account numbers, to speed the process. As with all important business communications, keep a copy of what you send.
Build a credit history by applying for credit with a local business, such as a department store, or borrow a small amount from your credit union or the bank where you have checking and savings accounts. A local bank or department store may approve your credit application even if you do not meet the standards of larger creditors.
If you are rejected for credit, find out why. There may be reasons other than lack of credit history. Your income may not meet the creditor's minimum requirement or you may not have worked at your current job long enough.
Wait at least six months before making each new application. Credit bureaus record each inquiry about you. Some creditors may deny your application based on your having too many credit inquiries.

If you still cannot get credit, ask someone with an established credit history to act as your co-signer. Then, once you have repaid the debt, try again to get credit on your own. Alternatively, you may wish to consider a secured credit card.

Who can see my credit file?

The Fair Credit Reporting Act allows access to your credit file only by the following: those authorized in writing by you, creditors to whom you are applying for credit, insurers, potential employers, and those who have a "legitimate business purpose related to a business transaction involving you" including, landlords, a state or local child support enforcement agency, insurance companies, employers and potential employers (but only with your consent), companies with which you have a credit account for account monitoring purposes, those considering your application for a government license or benefit if the agency is required to consider your financial status.

In addition, government agencies can obtain identifying information about you. This is limited to your name, current and former addresses, and current and former places of employment.

Every time someone requests a copy of your credit report, it is noted as an "inquiry" on your credit file. You are entitled to know who has requested your credit file within the past six months (or two years if for employment purposes). This information is provided when you order a copy of your credit report.

In addition to checking on the information in your report, review who has seen your file. Credit bureaus must establish procedures to keep anyone without a legitimate business purpose from obtaining your report, but unauthorized access to credit files does sometimes occur.

How can I decipher my credit report?

Your credit report is divided into four sections: identifying information, credit history, public records, and inquiries.

Identifying information is information used to identify you such as your maiden and married name(s), social security number, current and previous addresses, date of birth, telephone numbers, driver's license numbers, employer, and spouse's name.

Credit history is made up of your accounts, which are sometimes called tradelines. There are two types of credit accounts, revolving, which includes items such as credit cards, and installment, which includes car loans and mortgages. Each account listed includes the name of the creditor and the account number, when you opened your account, what kind of account it is, the payment amount, the status of the account (open, closed, paid, active), the balance if it's a loan, and how well you have paid the account (never late, 30 days late, etc.).

Public records lists financially related data such as bankruptcies, judgments and tax liens that would adversely affect your credit.

The last section, inquiries, is a list of everyone who has asked to see your credit report--everyone from credit card companies you applied to for a new card or banks for a new car loan and creditors interested in pre-qualifying you for a credit card.

It is vital that you understand every piece of information on your credit report in order that you be able to identify possible errors or omissions.

Read your report carefully, making a note of anything you do not understand. The credit bureau is required by law to provide trained personnel to explain it to you. If accounts are identified by code number, or if there is a creditor listed on the report that you do not recognize, ask the credit bureau to supply you with the name and location of the creditor so you can ascertain if you do indeed hold an account with that creditor.

In addition to the account information, credit reports often contain symbols and codes that look like "Greek" to the average consumer. Fortunately, every credit bureau report also includes a key explaining each code.

Equal Credit Opportunity Act (ECOA) Codes

The Equal Credit Opportunity Act (ECOA) requires creditors who report information about accounts to report it in the names of all people with a relationship to the account, including co-signers or authorized users. To help lenders identify your legal liability on all your credit accounts, credit bureaus add a code to each account, termed the ECOA code. Credit bureaus may list the ECOA codes differently, but the basic categories are as follows:

Individual. You alone are legally responsible. This designation gives you a strong credit reference, assuming a good history. You alone are legally responsible. This designation gives you a strong credit reference, assuming a good history. You alone are legally responsible. This designation gives you a strong credit reference, assuming a good history.

Joint. You and someone else -- often a spouse - are both legally liable. A joint account is equal to an individual account for building your credit history. You and someone else -- often a spouse - are both legally liable. A joint account is equal to an individual account for building your credit history. You and someone else -- often a spouse - are both legally liable. A joint account is equal to an individual account for building your credit history.

Co-signer. You signed loan documents for someone else, to help them qualify for a loan. Also referred to as "On Behalf of" (secured credit for another individual other than spouse).

Co-signer, primarily liable: You took out an account for yourself, but someone else co-signed for the loan to ensure payment. Also known as "Maker" (account for which subject is liable but a co-maker is liable if maker defaults.)

Authorized user. You can use the account, and may have a card in your name, but you did not sign the application and are not legally responsible. Because you have no legal obligation, this designation does not help you get your own credit history. You can use the account, and may have a card in your name, but you did not sign the application and are not legally responsible. Because you have no legal obligation, this designation does not help you get your own credit history. You can use the account, and may have a card in your name, but you did not sign the application and are not legally responsible. Because you have no legal obligation, this designation does not help you get your own credit history. Officially referred to as "Business/Commercial" and identifies that the company reported in the name fields is contractually liable for the account.

Undesignated. No status was reported by the creditor reporting the account information and is not used on accounts opened after 06/1977.

Credit Rating

How will a divorce or separation affect my credit?

Here are some tips for handling the credit aspects of divorce, both in the planning stages and afterward.

Cancel All Joint Accounts. First, it is important to cancel all joint accounts immediately once you know you are going to obtain a divorce.

Creditors have the right to seek payment from either party on a joint credit card or other credit account, no matter which party actually incurred the bill. If you allow your name to remain on joint accounts with your ex-spouse, you are also responsible for the bills.

Some credit contracts require that you immediately pay the outstanding balance in full if you close an account. If so, try to get the creditor to have the balance transferred to separate accounts.

If Your Spouse's Poor Credit Affects You.

If your spouse's poor credit hurts your credit record, you may be able to separate yourself from the spouse's information on your credit report. The Equal Credit Opportunity Act requires a creditor to take into account any information showing that the credit history being considered does not reflect your own. If for instance, you can show that accounts you shared with your spouse were opened by him or her before your marriage and that he or she paid the bills, you may be able to convince the creditor that the harmful information relates to your spouse's credit record, not yours.

In practice, it is difficult to prove that the credit history under consideration doesn't reflect your own, and you may have to be persistent.

Women: Maintain Your Own Credit-Before You Need It. If a woman divorces, and changes her name on an account, lenders may review her application or credit file to see whether her qualifications alone meet their credit standards. They may ask her to reapply, although the account remains open.

Maintaining credit in your own name avoids this inconvenience. It can also make it easier to preserve your own, separate, credit history. Further, should you need credit in an emergency, it will be available.

Do not use only your spouse's name, for example, "Mrs. John Wilson" for credit purposes.

Find out if there is any inaccurate or incomplete information in your file. If so, write to the credit bureau and ask them to correct it. The credit bureau must confirm the data within a reasonable time period, and let you know when they have corrected the mistake.

If you used your spouse's accounts, but never co-signed for them, ask to be added on as jointly liable for some of the major credit cards. Once you have several accounts listed as references on your credit record, apply for a department store card, or even a Visa or MasterCard, in your own name.

If you held accounts jointly and they were opened before 1977 (in which case they may have been reported only in your husband's name), point them out and tell the creditor to consider them as your credit history also. The creditor cannot require your spouse's or former spouse's signature to access his credit file if you are using his information to qualify for credit.

A secured credit card is a fairly quick, easy way to get a major credit card if you do not have a credit history.

What factors affect my credit rating?

Your credit rating is affected by a number of different factors, some obvious and others few consumers are aware of. The following factors are discussed below:

Whether you have a credit card or use another person's credit card
Whether you have a bank checking or savings account
Where you live
Your age
Your debt-income ratio
Whether you have declared bankruptcy or have had "charge-offs" to your account
Whether you are delinquent in any child support payments
Whether you have "too much" credit available

Does having a credit card or using another person's credit card improve my credit rating?

One of the best things you can have on a credit report is a bank credit card-- such as a Visa, MasterCard or Discover card -that has been paid on time over a specified period in the past. In a credit scoring system, a good bank card reference usually carries more weight than an American Express card or a department store card.

If you are an authorized user (someone who has permission to use a credit card, but is not legally liable for the bills) on someone else's account, the payment history will likely be reported in your credit file, but you won't be able to rely on it to help you build your own credit rating. Usually, it will neither help you nor hurt you when you apply for a loan.

Does having a checking or savings account improve my credit rating?

A checking or savings account will usually enhance your credit rating. Some banks give you extra points in applying for their credit card if you have a checking or savings account with them. In fact, some banks also give discounts on loan rates when you hold other accounts with them.

Is my credit rating affected by where I live?

Many creditors give a higher score to those who have lived at the same address for at least two years. Others give extra points just for living in the same area for two years or more.

Creditors may take into account your geographic location in scoring your length of time at one address. If you live in a city, where people move more often, the length of time at your address will probably count less than if you live in the country.

If your address is a post office box, you may find yourself turned down for credit. To fight fraud, some creditors screen out applicants whose addresses indicate commercial offices, mail drops or prisons.

Since post office boxes or rural delivery boxes are commonplace in rural areas, a lender may issue a card to that address while rejecting applicants with a P.O. Box in a large city.

People who own their homes usually earn a higher score than renters.

Does my age affect my credit rating?

If a lender's credit experience shows that people in a certain age group have a better record of paying their bills than people of other ages, that lender may, legally, give a higher score to the better-paying age group.

However, the Equal Credit Opportunity Act (ECOA), a federal law intended to prevent discrimination in lending, does not allow lenders to discriminate against people age 62 or over. The ECOA requires creditors using a scoring system to give those aged 62 and older an age-factor score at least as high as the best score given to anyone under age 62.

How important is my debt-income ratio in determining my credit-worthiness?

Some creditors look at your "debt/income ratio" to determine whether you qualify for credit and how much credit you qualify for.To find your debt/income ratio, total up your monthly payments on all bills. Then, divide these payments by your monthly gross income (before tax). This is your debt/income ratio.

If it's less than 28 percent, you should have no trouble getting a loan (and can consider yourself successful at managing your debt and maintaining a good credit rating). If it falls between 28 percent and 35 percent, you have what's considered high debt, and you may find it difficult to obtain some loans. If your debt/income ratio is 35 percent or more, you will probably not be able to get additional credit. More importantly, you are potentially in financial jeopardy.

Keep in mind that these are general guidelines. Some large card issuers will accept debt ratios as high as 40-45 percent. Others compare your net (after-tax) income to your debts to determine your debt ratio.

In determining your debt/income ratio, do not include payments for your mortgage, utility bills, doctor bills or other items that do not appear on your credit report: The creditor will not look at these.

If you should incur unexpected expenses, get ill, lose your job, or get divorced, you could find yourself unable to meet your obligations. Consider seeking credit counseling through a local non-profit consumer credit counseling service.

Will bankruptcies or "charge-offs" affect my credit rating?

Most lenders (but not all) will automatically reject you if your application or credit file indicates a bankruptcy. Both types of bankruptcy - Chapter 13 (the wage-earner's plan under which all debts are eventually repaid) and Chapter 7 (straight bankruptcy) - remain in your credit files for ten years. Few creditors draw any distinction between the two types, so you don't get any "credit" for having repaid your bills using Chapter 13. In addition to the bankruptcy itself remaining on your report for ten years, each separate account that was discharged through bankruptcy can be reported in your file for up to seven years.

In exchange for paying off a collection account, you may be able to negotiate with the creditor or collection agency the permanent removal of the negative information from your credit bureau files. However, lenders are under no obligation to make such an agreement.

"Charge-offs" (accounts written off as "uncollectible") and "collection accounts" (accounts sent either to the creditor's own collection department or to an outside collection agency) are extremely negative.

If an account that has been charged-off (other than for bankruptcy), the creditor will usually turn it over to a collection agency, which will then attempt to collect. It then becomes a "collection account" for reporting purposes.

If you pay the charged-off amount, make sure the creditor updates the account as a "paid charge-off."

Will medical debt or delinquent child support payments affect my credit?

According to the Consumer Financial Protection Bureau, as of June 2021, $88 billion of outstanding medical bills are currently in collections – affecting one in five Americans. However, starting in July 2022, medical debts will no longer affect your credit rating. If you've paid your medical bill in full, but the debt is still listed on your credit report as a negative mark, it will be removed. Furthermore, all three credit bureau reports will remove medical debt sent to collections but eventually paid off. Plus, any new medical debt incurred will not show up on your credit reports until one year from the date it is sent to collections.

Before July 2022, medical debt on consumer credit reports adversely impacted credit scores. Any unpaid medical debt owed 180 days after it was sent to collection stayed on your credit report for up to seven years - even if you already paid off that debt.

Delinquent child support frequently appears on credit reports. In 1984, Congress amended the federal Child Support Enforcement (CSE) legislation to require more routine reporting of delinquent payments. As a result, state child support enforcement agencies must report overdue child support to a credit bureau that requests such information, as long as the amount exceeds $1,000. CSE agencies may also report delinquencies of any amount voluntarily. Before a CSE agency reports your delinquent child support debts to a credit bureau, it must tell you that it will do so and provide you with information on how to dispute the delinquency.

Can my credit rating be negatively affected by having too much available credit?

You may be turned down for a loan because you have too much available credit. When creditors evaluate your application for credit, they ascertain whether, if you were to use all your available credit, you would be over your head.

Accounts you no longer use, or have paid off, can count against you if they are listed as "open" on a credit report. The act of paying off a revolving account does not, in itself, result in its being "closed" in the eyes of creditors. Further, some creditors do not report to credit bureaus the fact that accounts are closed.

Every time you close an account, ask the creditor to report it as "closed by consumer" to all credit bureaus to which the account has previously been reported. If a closed account appears on your credit report as open, dispute the entry with the credit bureau.

In determining whether you have too much available credit, creditors usually consider:

The number of accounts you hold. As noted above, having too many credit card accounts can count against you.
The total credit you have available. Having too much available credit can count against you.
Conversely, being at or near the limit on your credit cards (i.e., with little available credit) can also count against you if it suggests that you have incurred too heavy a debt load.

Financial Trouble

How can I tell whether I have too much debt?

If you answer yes to any one of the following questions, you should take action:

Have you run several credit cards up to the limit?
Do you frequently make only the minimum monthly payments?
Do you apply for almost any credit card you are offered--without checking out the terms?
Have you used the cash advance feature from one card to pay the minimum payment on another?
Do you use cash advances (or a credit card) for living expenses such as food, rent, or utilities?
Are you unable to say what your total debt is?
Are you unable to say how long it would take you to pay off all your current debts (excluding mortgages and cars) at the rate you have been paying?
If you find several of these statements describe your credit habits, it may be that you need to take steps to manage your debt before bill collectors start calling and your credit history is endangered.

What steps should I take if I get into financial trouble?

Here are some specific steps you can take if you are in financial trouble.

Review each debt that creditors claim you owe to make certain you really owe it, and that the amount is correct.
Contact your creditors to let them know you're having difficulty making your payments. Tell them why you're having trouble. Try to work out an acceptable payment schedule with your creditors.

Do not wait until your account is turned over to a debt collector. At that point, the creditor has given up on you. As soon as you find that you cannot make your payments, contact your creditors to try to work out a reduced payment plan.
Budget your expenses. Create a spending plan that allows you to reduce your debts. Itemize your necessary expenses (such as housing and healthcare) and optional expenses (such as entertainment and vacation travel). Stick to the plan.
Try to reduce your expenses. Cut out any unnecessary spending such as eating out and expensive entertainment. Consider taking public transportation rather than owning a car. Clip coupons, purchase generic products at the supermarket and avoid impulse purchases. Above all, stop incurring new debt. Consider substituting a debit card for your credit cards.
Use your savings and other assets to pay down debts. Withdrawing savings from low-interest accounts to settle high-rate loans usually makes sense.

Selling off a second car not only provides cash but also reduces insurance and other maintenance expenses.

If you are unable to make satisfactory arrangements with your creditors, there are organizations to help you with your financial situation. For instance, Consumer Credit Counseling Service (CCCS) agencies, which are local, nonprofit organizations affiliated with the National Foundation for Consumer Credit (NFCC), provide education and counseling to families and individuals.

To contact a CCCS office for confidential help, look in your telephone directory white pages, or call 1-800-431-8157 for an office near you. To contact the National Foundation for Consumer Credit Counseling and connect with an NFCC Certified Consumer Credit Counselor call 800-388-2227.

Some people with debt problems have found that Debtors Anonymous, General Service Office, PO Box 920888, Needham, MA 02492-0009, 1-800-421-2383 has provided helpful service.

Personal bankruptcy, a serious step, should be considered only if other means have been exhausted, and only if it is the best way to deal with financial problems. A skilled and trusted bankruptcy lawyer should be consulted.

What can I do if I am being hounded by a debt collector?

If you fall behind in paying your creditors, or an error is made on your accounts, you may be contacted by a "debt collector." The Fair Debt Collection Practices Act prohibits certain practices by debt collectors.

What to do: To stop a debt collector from calling you, write a letter to the collection agency telling them to stop. Once the agency receives your letter, it may not contact you again except to say there will be no further contact. Another exception is that the agency may notify you if the debt collector or the creditor intends to take some specific action.

If you believe a debt collector has violated the law by harassing you, you have the right to sue a collector in a state or federal court within one year from the date you believe the law was violated. The following practices are specifically prohibited.

Harassment, Oppression, or Abuse. For example, debt collectors may not:

Use threats of violence or harm against the person, property, or reputation
Publish a list of consumers who refuse to pay their debts (except to a credit bureau)
Use obscene or profane language
Repeatedly use the telephone to annoy someone
Telephone people without identifying themselves
Advertise your debt

False Statements. For example, debt collectors may not:
Give false credit information about you to anyone
Send you anything that looks like an official document from a court or government agency when it is not
Use a false name
Falsely imply that they are attorneys or government representatives
Falsely imply that you have committed a crime
Falsely represent that they operate or work for a credit bureau
Lie about the amount of your debt
Lie about the involvement of an attorney in collecting a debt
Indicate that papers being sent to you are legal forms when they are not
Indicate that papers being sent to you are not legal forms when they are
Tell you that you will be arrested if you do not pay your debt
Tell you they will seize, garnish, attach, or sell your property or wages, unless the collection agency or creditor intends to do so, and it is legal to do so
Tell you that actions, such as a lawsuit, will be taken against you, which legally may not be taken, or which they do not intend to take
Unfair Practices. For example, collectors may not:
Collect any amount greater than your debt, unless allowed by law
Deposit a post-dated check prematurely
Make you accept collect calls or pay for telegrams
Take or threaten to take your property unless this can be done legally
Contact you by postcard

What are my rights against banks, creditors and debt collectors?

You have the following rights:

Banks. If you have a complaint about a bank in connection with any of the Federal credit laws or if you think any part of your business with a bank has been handled in an unfair or deceptive way write the nearest office of the Federal Trade Commission or Consumer & Community Affairs, Board of Governors of the Federal Reserve System, 20th & Constitution Avenue, N.W. Washington, D.C. 20551.
Credit Clinics. File a complaint with the Better Business Bureau, your state attorney general's office, and the Federal Trade Commission (FTC).
Debt Collectors. Report any problems you have with a debt collector to your state Attorney General's office and the Federal Trade Commission.
Other Institutions. The Federal Trade Commission enforces a number of federal laws involving consumer credit, including the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Fair Credit Billing Act, and the Fair Debt Collection Practices Act.

You may also take legal action against a creditor. If you decide to bring a lawsuit, here are the penalties a creditor must pay if you win:
Truth in Lending and Consumer Leasing Acts. If any creditor fails to disclose information required under these Acts, or gives inaccurate information, or does not comply with the rules about credit cards or the right to cancel certain home-secured loans, you as an individual may sue for actual damages-any money loss you suffer. In addition, you can sue for twice the finance charge in the case of certain credit disclosures, or, if a lease is concerned, 25 percent of total monthly payments. You may also be entitled to reimbursement for court costs and attorney's fees.
Equal Credit Opportunity Act. If you think you can prove that a creditor has discriminated against you for any reason prohibited by the Act, you as an individual may sue for actual damages plus punitive damages of up to $10,000.
Violations by Debt Collectors. You have the right to sue a collector for violations under the Fair Debt Collection Practices Act in a state or federal court within one year from the date you believe the law was violated. If you win, you may recover money for the damages you suffered. A group of people also may sue a debt collector and recover money for damages up to $500,000, or one percent of the collector's net worth, whichever is less.
Fair Credit Billing Act. A creditor who breaks the rules for the correction of billing errors automatically loses the amount owed on the item in question and any finance charges on it, up to a combined total of $50- even if the bill was correct.
Fair Credit Reporting Act. You may sue any credit reporting agency or creditor for breaking the rules about who may see your credit records or for not correcting errors in your file. A person who obtains a credit report without proper authorization or an employee of a credit reporting agency who gives a credit report to unauthorized persons may be fined up to $5,000 or imprisoned for one year, or both.

Banking

Financing Questions

How Can I Raise Money For My Small Business?

Even though, raising capital is the most basic of all business activities, it can be a complex and frustrating process. There are several sources to consider when looking for financing. The primary source of capital for most new businesses comes from savings and other forms of personal resources. While credit cards are often used to finance business needs, there may be better options available, even for very small loans.

Many entrepreneurs also look to private sources such as friends and family when starting out in a business venture. Often, money is loaned interest-free or at a low-interest rate, which can be beneficial when getting started.

Outside of personal resources, the most common source of funding is a bank or credit union. Venture capital firms also help companies grow in exchange for equity or partial ownership.

What Types Of Loans Exist For Business Financing?

To successfully obtain a loan, you must know exactly how much money you need, why you need it, and how you will pay it back. Your written proposal must convince the lender that you are a good credit risk.

Terms of loans vary from lender to lender, but there are two basic types of loans: Short-term and long-term.

Generally, a short-term loan has a maturity of up one year. These include working capital loans, accounts receivable loans, and lines of credit

Long-term loans have maturities greater than one year but usually less than seven years. Real estate and equipment loans may have maturities of up to 25 years. Long-term loans are used for major business expenses such as purchasing real estate and facilities, construction, durable equipment, furniture and fixtures, vehicles, etc.

What Do Banks Look For When Considering A Loan Request?

When reviewing a loan request, the bank official is primarily concerned about repayment. To help determine this ability, many loan officers will order a copy of your business credit report from a credit-reporting agency.

Using the credit report and the information you have provided, the lending officer will consider the following issues:

Have you invested savings or personal equity in your business totaling at least 25 to 50 percent of the loan you are requesting? Remember, a lender or investor will not finance 100 percent of your business.
Do you have a sound record of credit-worthiness as indicated by your credit report, work history and letters of recommendation? This is very important.
Do you have sufficient experience and training to operate a successful business?
Have you prepared a loan proposal and business plan that demonstrate your understanding of and commitment to the success of the business?
Does the business have sufficient cash flow to make the monthly payments on the amount of the loan request?

How Do I Write A Good Loan Proposal?

A good loan proposal contains the following key elements:

General Information

Business name and address, names of principals and their social security numbers.
Purpose of the loan: exactly what the loan will be used for and why it is needed.
Amount of money required: the exact amount you need to achieve your purpose.

Business Description
Details of what kind of business it is, how long it has existed, number of employees, and current business assets.
Ownership structure: details on your company's legal structure.

Management Profile

Develop a short statement on each principal in your business, including background information such as education, experience, skills, and accomplishments.

Market Information

Clearly define your company's products as well as your markets, identify your competition, and explain how your business competes in the marketplace. Profile your customers and explain how your business can satisfy their needs.

Financial Information
Financial statements: balance sheets and income statements for the past three years. If you are just starting out, provide a projected balance sheet and income statement.
Personal financial statements on yourself and other principal owners of the business.
Collateral you would be willing to pledge as security for the loan.

Getting a Loan

Should I prepay my mortgage?

As a general rule, if you are able to prepay your mortgage (and if there is no penalty for doing so) you should prepay as much as you can every month. There are, however, two exceptions to the general rule:

You do not have an emergency fund of three to six months' worth of expenses stashed away. Any extra money you have should be put towards the emergency fund. Once you've achieved this essential financial goal, then you can begin paying down your mortgage.
You have a large amount of credit card debt. In such case, all of your extra funds should be used to pay down those debts.

In addition, there are a few individuals for whom paying down a mortgage earlier might not be as beneficial financially, particularly if they achieve a better return by investing that money elsewhere. Whether an investor fits into this category depends on his or her marginal tax rate, mortgage interest rate, the return they can get on an investment, and any long-term investment goals they might have.

When should I refinance my home?

Refinancing becomes worth your while if the current interest rate on your mortgage is at least 2 percentage points higher than the prevailing market rate. Talk to some lenders to determine what rates are available and the costs associated with refinancing. These costs include appraisals, attorney's fees, and points.

Once you know what the costs will be, figure out what your new payment would be if you refinanced. You can then estimate how long it will take to recover the costs of refinancing by dividing your closing costs by the difference between your new and old payments (your monthly savings).

Be aware that the amount you ultimately save depends on many factors, including your total refinancing costs, whether you sell your home in the near future, and the effects of refinancing on your taxes.

Should I borrow against my securities?

Borrowing against your securities can be a low-cost way to borrow money. No deduction is allowed for the interest unless the loan is used for investment or business purposes.

Tip: If your margin debt exceeds 50 percent of the value of your securities, you will be subject to a margin call, which means that you will have to come up with cash or sell securities. If the market is falling at the time, a margin call can cause a financial disaster. Therefore, we recommend against the use of margin debt, unless the amount is kept way below 50 percent. Twenty-five percent is a much safer percentage.

What is a home equity line of credit?

A home equity line of credit is a form of revolving credit in which your home serves as collateral. Because a home is likely to be a consumer's largest asset, many homeowners use their credit lines only for major items such as education, home improvements, or medical bills and not for day-to-day expenses.

With a home equity line, you will be approved for a specific amount of credit, in other words, the maximum amount you can borrow at any one time while you have the plan.

Many lenders set the credit limit on a home equity line by taking a percentage (say, 75 percent) of the appraised value of the home and subtracting the balance owed on the existing mortgage. For example:

Appraisal of home $100,000

Percentage x 75%

Percentage of appraised value $75,000

Less mortgage debt -40,000

Potential credit line $35,000

In determining your actual credit line, the lender will also consider your ability to repay by looking at your income, debts, and other financial obligations, as well as your credit history.

Once you're approved for a home equity loan, you will usually be able to borrow up to your credit limit whenever you want. Typically, you draw on your line of credit by using special checks, but under some plans, borrowers can use a credit card or other means to borrow money and make purchases. There may be limitations on how you use the line, however. Some plans may require you to borrow a minimum amount each time you draw on the line--for example, $300--and to keep a minimum amount outstanding.

What are the costs of obtaining a home equity line of credit?

Many of the costs in setting up a home equity line of credit are similar to those you pay when you buy a home. For example these fees may be charged:

A fee for a property appraisal, which estimates the value of your home
An application fee, which may not be refundable if you are turned down for credit
Up-front charges, such as one or more points (one point equals one percent of the credit limit)
Other closing costs, which include fees for attorneys, title search, mortgage preparation and filing, property and title insurance, as well as taxes
Yearly membership or maintenance fees

You also may be charged a transaction fee every time you draw on the credit line.

What is an interest rate "lock-in"?

If you decide to apply for financing with a particular lender, and if you do not want to let the interest rate "float" until closing, then get a written statement guaranteeing the interest rate and the number of discount points that you will pay at closing. This binding commitment or "lock-in" ensures that the lender will not raise these costs even if rates increase before you settle on the new loan. You also may consider requesting an agreement where the interest rate can decrease (but not increase) before closing. If you cannot get the lender to put this information in writing, you may want to choose one that will.

Most lenders place a limit on the length of time (say, 60 days) that they will guarantee the interest rate. You must sign the loan during that time or lose the benefit of that particular rate. Because many people are refinancing their mortgages, there may be a delay in processing the papers. Therefore, it may be wise to contact your loan officer periodically to check on the progress of your loan approval and to see if information is needed.

What disclosures must a lender give you?

For a financing loan, the lender must give you a written statement of the costs and terms of the financing before you become legally obligated for the loan. This is required by the Truth in Lending Act and you usually receive the information around the time of settlement--although some lenders provide it earlier.

Tip: Review this statement carefully before you sign the loan. The disclosure tells you what the APR, finance charge, amount financed, payment schedule, and other important credit terms are.

If you refinance with a different lender, or if you borrow beyond your unpaid balance with your current lender, you also must be given the right to rescind the loan. In these loans, you have the right to rescind or cancel the transaction within three business days following settlement, receipt of your Truth in Lending disclosures, or receipt of your cancellation notice, whichever occurs last.

What is a reverse mortgage?

A reverse mortgage is a type of home equity loan that allows you to convert some of the equity in your home into cash while you continue to own the home. Reverse mortgages operate like traditional mortgages, only in reverse. Rather than paying your lender each month, the lender pays you. Reverse mortgages differ from home equity loans in that most reverse mortgages do not require any repayment of principal, interest, or servicing fees as long as you live in the home.

The reverse mortgage's benefit is that it allows homeowners who are age 62 and over to keep living in their homes and to use their equity for whatever purpose they choose. A reverse mortgage might be used to cover the cost of home health care, or to pay off an existing mortgage to stop a foreclosure, or to support children or grandchildren.

When the homeowner dies or moves out, the loan is paid off by a sale of the property. Any leftover equity belongs to the homeowner or the heirs.

What loan interest is tax-deductible?

The deductibility of interest has been limited in recent years. The following types of interest are at least partially deductible:

Mortgage interest
Business interest
Investment interest
Education related interest

What are the limitations on deductibility of mortgage interest?

Generally, interest expense on the taxpayer's primary residence and second (but not a third) home, is deductible. Interest is only deductible on the first $1,000,000 of the acquisition loan ($500,000 if married filing jointly). As the loan is paid off the limit is reduced. In other words, you cannot refinance a loan for a higher amount than the current principal balance and increase the deduction. In addition interest on a home equity loan of up to $100,000 can be deducted.

Is interest expense incurred for business purposes deductible?

Yes. Interest expense incurred for a trade or business is deductible against the income of that business. For example, if you are self-employed the business interest would be deducted on Schedule C.

Is investment related interest expense deductible?

Yes. Investment interest is deductible up to the amount of investment income.

Is interest on educational loans tax deductible?

For FAQs on deducting education loans, see Tax Benefits of Higher Education above.

When can you stop paying private mortgage insurance?

Generally, if you make a down payment of less than 20 percent when buying a home, the lender will require you to buy private mortgage insurance (PMI). You can generally drop the PMI when you have attained 20 percent equity in the home, or when the value of your home goes up (due to a good real estate market) so that your equity constitutes 20 percent.

Under the Homeowner's Protection Act (HPA) of 1998 you have the right to request cancellation of PMI when you pay down your mortgage to the point that it equals 80 percent of the original purchase price or appraised value of your home at the time the loan was obtained, whichever is less. You also need a good payment history, meaning that you have not been 30 days late with your mortgage payment within a year of your request, or 60 days late within two years. Your lender may require evidence that the value of the property has not declined below its original value and that the property does not have a second mortgage, such as a home equity loan.

Under HPA, mortgage lenders or servicers must automatically cancel PMI coverage on most loans, once you pay down your mortgage to 78 percent of the value if you are current on your loan. If the loan is delinquent on the date of automatic termination, the lender must terminate the coverage as soon thereafter as the loan becomes current. Lenders must terminate the coverage within 30 days of cancellation or the automatic termination date, and are not permitted to require PMI premiums after this date. Any unearned premiums must be returned to you within 45 days of the cancellation or termination date.

For high-risk loans, mortgage lenders or servicers are required to automatically cancel PMI coverage once the mortgage is paid down to 77 percent of the original value of the property, provided you are current on your loan.

If PMI has not been canceled or otherwise terminated, coverage must be removed when the loan reaches the midpoint of the amortization period. On a 30-year loan with 360 monthly payments, for example, the chronological midpoint would occur after 180 payments. This provision also requires that the borrower must be current on the payments required by the terms of the mortgage. Final termination must occur within 30 days of this date.

HPA applies to residential mortgage transactions obtained on or after July 29, 1999, but it also has requirements for loans obtained before that date.

Loan Questions

What should I do if a friend or family member asks me to co-sign a loan?

Many people agree to co-sign loans for friends or relatives, as a favor, as a vote of confidence, or because they just can't say no. Unfortunately, their act of kindness often backfires because according to many finance companies most cosigners end up paying off the loans they've cosigned--along with late charges, legal fees and all. Not only is this an unwanted out-of-pocket expense, but it can also affect the cosigner's credit record.

While a lender will generally seek repayment from the debtor first, it can go after the cosigner at any time. When you agree to cosign a loan for a friend or family member, you are also responsible for its repayment along with the borrower.

Guaranteeing a loan is a better option than to cosign one in that where a loan is guaranteed, the lender can usually go after the guarantor only after the principal debtor has actually defaulted.

However, if you've decided you're willing to cosign a loan, at the very least you should seek the lender's agreement to refrain collecting from you until the borrower actually defaults, and try to limit your liability to the unpaid principal at the time of default. You should also plan on staying apprised of the borrower's financial situation to prevent him or her from defaulting on the loan. An example of this might be having the lender notify you whenever a payment is late.

Cosigning an Account. You may be asked to cosign an account to allow someone else to obtain a loan. With cosigning, your payment history and assets are used to qualify the cosigner for the loan.

Cosigning a loan, whether for a family member, friend, or employee, is not recommended. Many have found out the hard way that cosigning a loan only leads to trouble.

It bears repeating that cosigning a loan is no different than taking out the loan yourself. When you cosign, you are signing a contract that makes you legally and financially responsible for the entire debt. If the other cosigner does not pay, or makes late payments, it will probably show up on your credit record. If the person for whom you cosigned does not pay the loan, the collection company will be entitled to try to collect from you.

If the cosigned loan is reported on your credit report, another lender will view the cosigned account as if it were your own debt. Further, if the information is correct, it will remain on your credit report for up to seven years.

If someone asks you to cosign a loan, suggest other alternatives such as a secured credit card by which they can build a credit history. If you are asked to cosign for someone whose income is not high enough to qualify for a loan, you are actually doing them a favor by refusing because they will be less likely to be overwhelmed by too much debt. If you're still considering cosigning a loan, then you might want to consult an attorney before taking any action to find out what your liability is, if in fact the other person does default.

If you have already cosigned for someone, and he or she is not making payments on time, consider making the payments yourself and asking the cosigner to pay you directly, in order to protect your credit rating.

How can I get the best deal on a home equity loan or an equity line of credit?

If you decide to apply for a home equity loan, look for the plan that best meets your particular needs. Look carefully at the credit agreement and examine the terms and conditions of various plans, including the annual percentage rate (APR) and the costs you'll pay to establish the plan.

The disclosed APR will not reflect the closing costs and other fees and charges, so compare these costs, as well as the APRs, among lenders.

Interest Rates. Home equity plans typically involve variable interest rates rather than fixed rates. A variable rate must be based on a publicly available index (such as the prime rate published in some major daily newspapers or a U.S. Treasury bill rate). The interest rate will change, mirroring fluctuations in the index.

To figure the interest rate that you will pay, most lenders add a margin, such as 2 percentage points, to the index value.

Because the cost of borrowing is tied directly to the index rate, find out what index and margin each lender uses, how often the index changes, and how high it has risen in the past.

Sometimes lenders advertise a temporarily discounted rate for home equity loans-a rate that is unusually low and often lasts only for an introductory period, such as six months.

Variable rate plans secured by a dwelling must have a ceiling (or cap) on how high your interest rate can climb over the life of the plan. Some variable-rate plans limit how much your payment may increase, and also how low your interest rate may fall.

Some lenders permit you to convert a variable rate to a fixed interest rate during the life of the plan, or to convert all or a portion of your line to a fixed-term installment loan.

Agreements generally permit the lender to freeze or reduce your credit line under certain circumstances, such as during any period the interest rate reaches the cap.

What are the costs of obtaining a home equity line of credit?

Many of the costs in setting up a home equity line of credit are similar to those you pay when you buy a home.

For example, these fees may be charged:

A fee for a property appraisal, which estimates the value of your home
An application fee, which may not be refundable if you are turned down for credit
Up-front charges, such as one or more points (one point equals one percent of the credit limit)
Other closing costs, which include fees for attorneys, title search, mortgage preparation and filing, property and title insurance, as well as taxes
Yearly membership or maintenance fees

You also may be charged a transaction fee every time you draw on the credit line.

You could find yourself paying hundreds of dollars to establish the plan. If you were to draw only a small amount against your credit line, those charges and closing costs would substantially increase the cost of the funds borrowed.

On the other hand, the lender's risk is lower than for other forms of credit because your home serves as collateral. Thus, annual percentage rates for home equity lines are generally lower than rates for other types of credit.

The interest you save could offset the initial costs of obtaining the line. In addition, some lenders may waive a portion or all of the closing costs.

Should I obtain a home equity line of credit or a traditional second mortgage loan?

If you are thinking about a home equity line of credit you might also want to consider a traditional second mortgage loan. This type of loan provides you with a fixed amount of money repayable over a fixed period. Usually the payment schedule calls for equal payments that will pay off the entire loan within that time.

Consider a traditional second mortgage loan instead of a home equity line if, for example, you need a set amount for a specific purpose, such as an addition to your home.

In deciding which type of loan best suits your needs, consider the costs under the two alternatives. Look at the APR and other charges.

Do not simply compare the APR for a traditional mortgage loan with the APR for a home equity line because the APRs are figured differently. The APR for a traditional mortgage takes into account the interest rate charged plus points and other finance charges. The APR for a home equity line is based on the periodic interest rate alone. It does not include points or other charges.

How should I determine which of several loan alternatives is best?

Use the legally-required disclosures of loan terms to compare the costs of home equity loans.

The Truth in Lending Act requires lenders to disclose the important terms and costs of their home equity plans, including the APR, miscellaneous charges, the payment terms, and information about any variable-rate feature. In general, neither the lender nor anyone else may charge a fee until after you have this information.

You usually get these disclosures when you receive an application form, and you will get additional disclosures before the plan is opened. If any term has changed before the plan is opened (other than a variable-rate feature), the lender must return all fees if you decide not enter into the plan because of the changed term.

Credit costs vary. By remembering two terms, you can compare credit prices from different sources. Under Truth in Lending, the creditor must tell you-in writing and before you sign any agreement-the finance charge and the annual percentage rate.

The finance charge is the total dollar amount you pay to use credit. It includes interest costs, and other costs, such as service charges and some credit-related insurance premiums.

For example, borrowing $100 for a year might cost you $10 in interest. If there were also a service charge of $1, the finance charge would be $11.

The annual percentage rate (APR) is the percentage cost (or relative cost) of credit on a yearly basis. This is your key to comparing costs, regardless of the amount of credit or how long you have to repay it:

You borrow $100 for one year and pay a finance charge of $10. If you can keep the entire $100 for the whole year and then pay back $110 at the end of the year, you are paying an APR of 10 percent. But, if you repay the $100 and finance charge (a total of $110) in twelve equal monthly installments, you don't really get to use $100 for the whole year. In fact, you get to use less and less of that $100 each month. In this case, the $10 charge for credit amounts to an APR of 18 percent.

All creditors-banks, stores, car dealers, credit card companies, finance companies- must state the cost of their credit in terms of the finance charge and the APR. Federal law does not set interest rates or other credit charges. But it does require their disclosure--before you sign a credit contract or use a credit card--so you can compare costs.

Bank Accounts

What banking fees do you need to look out for when shopping for a bank account?

Fortunately, banks are required to give you a list of fees for their accounts. Even with interest, the best account is usually the one with the lowest fees.

Checking accounts are minefields for potential banking charges. Be sure you ask about monthly fees, fees for check processing, and ATM fees. A no-cost checking account may impose a charge if your balance drops below a minimum dollar amount. Check printing charges have sky-rocketed in recent years to as much as $24 at some banks. You can have your checks printed for much less by an outside financial printer.

It rarely makes sense anymore to park money in an old-fashioned "passbook" savings account. Monthly account fees may overshadow the small amount of interest you will earn. Put it in your checking account instead if you can refrain from spending it. If it's a big enough sum, you might want to put it in a money market account. You will earn more interest than in a savings account, but make sure you don't get hit with a monthly charge if your balance falls too low.

What are the different types of bank accounts available?

The accounts offered by depository institutions generally fall within one of these types:

Checking accounts. With a checking account, you write checks to withdraw your deposited funds from the account. Checking accounts provide you with quick, convenient and frequent access to your money. You can make deposits as often as you like. Most institutions provide customers with access to an automated teller machine (ATM) for banking transactions or debits for purchases at stores.

Some checking accounts pay interest; others do not. A regular checking account -usually called a demand deposit account-does not pay interest, while a negotiable order of withdrawal (NOW) account-does.

Various fees are charged on checking accounts, in addition to the charge for the checks you order. Fees vary among institutions. Some charge a maintenance or flat monthly fee regardless of the balance in your account. Other institutions charge a monthly fee if the minimum balance in your account drops below a certain amount any day during the month or if the average balance for the month drops below the specified amount. Some charge a fee for every transaction, such as for each check you write or for each withdrawal you make at an ATM. Many institutions impose a combination of these fees.

Money market deposit accounts. A money market deposit account (MMDA) is an interest-bearing account that allows you to write checks. An MMDA usually pays a higher rate of interest than a checking or savings account. MMDAs usually require a higher minimum balance to start earning interest, and often pay higher rates of interest for higher balances.

Making withdrawals from an MMDA is less convenient than withdrawing from a checking account. You are limited to six transfers per month to another account or to other parties, and only three of these can be by check. Most institutions charge fees with MMDAs.
Savings accounts. With savings accounts, you can make withdrawals, but you do not have the flexibility of checks. As with an MMDA, the number of withdrawals or transfers per month may be limited.

Many banks offer more than one type of savings account, for example, passbook savings and statement savings. With passbook savings you get a record book in which deposits and withdrawals are entered; this record book must be presented when making deposits and withdrawals. With statement savings, the bank mails you a regular statement showing withdrawals and deposits.

As with other accounts, various fees, such as minimum balance fees, may be charged on savings accounts.
Credit union accounts. Credit union accounts are similar to those at banks, but have different names. Credit union members have share-draft (rather than checking) accounts, share (rather than savings) accounts, and share certificate (rather than certificate of deposit) accounts.

Tip: Credit unions typically charge less for banking services than banks. Thus, if you have access to a credit union, it pays to use it.
Certificates of deposit. Certificates of deposit, or CDs, are time deposits. CDs offer a guaranteed rate of interest for a specified term, such as one year. With CDs, you can choose from among various lengths of time that your money is on deposit, ranging from several days to several years.

Once you pick the term you want, you will generally have to keep your money in the account until the term ends. Some banks allow you to withdraw the interest earned while leaving your initial deposit (the principal) in the CD. Because you are leaving your funds with the bank for a set period of time, the rate of interest is generally higher than for savings or other accounts. Typically, the longer the term, the higher the annual percentage yield.

If you withdraw your principal before maturity, a penalty is usually charged. Penalties vary among institutions, and can be hefty-sometimes greater than the interest earned, eating into your principal.

The bank will notify you before the maturity date for most CDs. Often CDs renew automatically.

Tip: If you are going to take out your money at maturity, keep track of the maturity date and notify the institution that you wish to take out your money. Otherwise the CD will roll over for another term.
Basic or no-frills accounts. Basic or no-frill accounts, which may be offered by some banks, give you limited services for a lower price. Basic accounts give you a convenient way to pay bills and cash checks for less than you might pay without any account at all. Basic accounts are checking accounts, but the number of checks you can write and the number of deposits and withdrawals you can make is limited. Interest generally is not paid.

Tip: Compare basic and regular checking accounts, taking into account your check-writing needs, to get the best deal in low fees or low minimum balance requirements. If you don't write many checks and don't want to keep a minimum balance in the checking account, the basic account may be worth your while.

What type of account should I open?

The answer depends on how you plan to use the account. If you want to build up your savings and you won't need your money soon, a certificate of deposit will serve your purposes.

If you need to reach your money easily, however, a savings account may be a better choice. And if you want a way to pay bills, a checking account is probably best for you.

Tip: If you usually write only two or three checks per month, an MMDA might be a better deal than a checking account. MMDAs pay a higher rate of interest than checking accounts, but require a higher minimum balance.

Checking accounts have other advantages. They simplify your recordkeeping. Canceled checks provide you with receipts at tax time, and the check register is a convenient way of keeping track of monthly expenses.

Account features and fees vary from one institution to the next. It's important to take the time to ask bank employees about any account features and fees before you open an account.

Tip: To get the most out of a checking account, find out what the minimum balance for avoiding fees is, and keep that minimum in the account. Further, try to get a checking account that will pay you interest, or that looks to the combined balance in checking and savings accounts to arrive at the minimum required balance. This way, you will not be paying the bank for the checking services, and your money will be earning some interest-although not at a great rate.

How should I shop for a "best buy" bank account?

Choosing an account is a matter of comparing the features of accounts at various banks. The features that should be compared are:

Interest Rates. Determine the interest rate on an account. Find out whether the institution can change the rate after you open the account. In addition, find out the following:

Does the institution pay different rates of interest depending on the amount of your account balance, and, if so, in what way is interest calculated? (See Tiered Interest Rates, below.)
How often is interest compounded? In other words, when does the institution start paying interest on the interest you've already earned in the account?
What is the annual percentage yield? The APY is a rate that reflects the amount of interest you will earn on a deposit.
What is the minimum balance required before you earn interest?

Tip: Find out how the bank calculates the minimum balance requirement. A calculation that is based on the minimum daily balance is best for you.
Do you begin earning interest the day you deposit a check into your account-called "earning on your ledger balance"-- or do you begin earning interest later, when the institution receives credit for the check-known as "earning on your collected balance"?

Institutions may pay different rates tied to different balance amounts.

Example: An institution pays a 5 percent interest rate on balances up to $5,000 and 5.5 percent on balances above $5,000. If you deposit $8,000, the institution that pays interest on the entire balance pays you 5.5 percent on the entire $8,000. Other institutions may pay you 5 percent on the first $5,000 and 5.5 percent only on the remaining $3,000.

Tip: To tell which method an institution uses, check the annual percentage yield (APY) disclosure. If it is a single figure for a balance level, you will be paid the stated interest rate for the entire balance. If the APY is stated as a range for each balance level, your earnings will depend on the balance you keep in each level. Of course, getting paid the stated interest rate on the entire balance is a better deal.
- Fees. Ask the following questions of each bank/account that you are considering:
- Will you pay a flat per-month fee? How much?
- Will you pay a fee if the balance in your account drops below a certain amount? How much?
- Is there a charge for each deposit and withdrawal you make? How much?
- How much will it cost you to use an ATM to make deposits and withdrawals on your account? Does it matter whether the transaction takes place at an ATM owned by the institution?
  
  Tip: You can cut ATM fees by limiting yourself to only one withdrawal per week, or by using only ATMs owned by your bank.
- Is there a charge for bill payment by phone or modem? How much?
- If you have a checking account or an MMDA, how much will new checks cost?
  
  Tip: You can save up to 50 percent on the cost of checks by ordering your checks from your own supplier, instead of letting the bank order them.
- Will you be charged for each check you write? How much?
- Are fees reduced if you have other accounts at the institution?
- Are fees reduced or waived if you agree to directly deposit your paycheck or government payments (e.g., Social Security check)?
- What is the fee for stopping payment on a check you have written?
- Is there a charge for making a balance inquiry?
- Does the institution charge a fee for closing an account soon after it is opened? If it does, when will the fee be imposed?
- Are you charged to have canceled checks returned to you with your statement? How much?
- What is the charge for writing a check that bounces (a check returned for insufficient funds)? And what happens if you deposit a check written by another person, and it bounces? Are you charged a fee?
- Limitations. Find out whether the following will apply to the account:
- Does the institution limit the number or the dollar amount of withdrawals or deposits you make?
- If you close the account before interest is credited to your account, will you be credited with the interest that has been earned?
- How long does it take for checks to clear? How soon does the institution allow you to withdraw funds that you have deposited to your account?
  
  If you are looking into a CD, here are some questions to ask:
- What is the term of the account (i.e., how long until maturity)?
- Will the account roll over automatically? Does the account renew unless you withdraw your money at maturity or during any grace period? A grace period is the time after maturity when you can withdraw your money without penalty. If there is a grace period, how long is it?
- If you are allowed to withdraw your money before maturity, is there a penalty? How much?
- Will the institution regularly send you the amount of interest you are earning on your account-or regularly credit it to another account of yours?

How much protection is provided by federal deposit insurance?

Federal deposit insurance sets apart deposit accounts from other savings choices. Only deposit accounts at federally insured depository institutions are protected by federal deposit insurance. Generally, the government protects up to $250,000 per depositor, per FDIC-insured bank, per ownership category. Accounts for special relationships, such as trusts or co-owners, may also have some effect on the amount of insurance coverage you have.

Tip: Ask the bank how the deposit insurance rules will apply to your deposit account. Federally insured depository institutions also offer products that are not protected by insurance. For example, you may purchase shares in a mutual fund or an annuity. These investments are not protected by the federal government.

How can I negotiate checking account fees with my current bank?

Here are some tips for negotiating with your current bank to try to get a better deal on your checking account.

Step One: Take a look at your past three or four checking account statements. Find out what all of the fees and charges are, and make notes of them.
Step Two: Figure out your checking account needs, and jot them down. How many checks do you write per month? How many ATM visits do you make? How many deposits do you make? How many times are you overdrawn? How often do you go below the minimum required balance?
Step Three: Armed with this information, check with several other area banks to find out what they charge for the same services. Do this over the phone, if you have the time, or ask for the information to be sent to you in the mail.
Step Four: Now you are ready to go to your own bank. Speak to a manager. Say that you are looking to reduce your banking costs. Ask them to cut fees, and if they won't budge, tell them what the competition is offering. They may move on certain fees if they sense they will lose your business. Ask whether you can lower costs by: using direct deposit, getting photocopies of canceled checks instead of the checks themselves, or opening another account or CD.

Tip: Many banks offer free checking to seniors, students, or the disabled, if the depositor asks for this service.

Tip: If you decide to take your business elsewhere, don't overlook smaller banks, which may be more eager for your business.

What questions should I ask when shopping for a Checking Account?
You need to know exactly how much a checking account will cost you. Get a list from your banker of all possible fees, including charges for maintaining the account, processing checks, bouncing checks, using the ATM, stopping payment, and transferring funds. Ask if the account will be cheaper if the bank does not return canceled checks. In the rare event that you need one, ask how much, if anything, it will cost to get a copy. To avoid bouncing checks, ask how long you have to wait after depositing funds to draw on them.

For interest checking accounts, ask how the bank calculates the interest. If the bank pays more on accounts with higher balances, be sure you get a "tiered" rate, which pays you the highest interest on all the money you have in the account. Be sure you know the charge for falling below the minimum balance, too. It might be more than the interest you will earn. Finally, some banks reduce charges on checking accounts if you take out a loan or buy a CD. Ask what deals are available.

What is overdraft protection and should I have it?

Many people overlook a valuable service offered by banks: the overdraft protection line of credit. With this protection, if you write a check which would overdraw your account a loan is automatically made from a line of credit. With this protection you will not bounce any checks.

This type of service is most valuable to a self-employed individual whose business is seasonal. If there are times during the year when you have cash flow problems, the overdraft protection line of credit can save you headaches-and at a lower interest rate than other forms of borrowing.

Starting in 2010, automatic overdraft protection is no longer provided by banks and bank customers must opt-in for this protection. Don't neglect to inquire about this service if it would suit your situation.

What is the Truth in Savings Act?

The Truth in Savings Act, a federal law, requires depository institutions to disclose to you the important terms of their consumer deposit accounts. Institutions must tell you:

The annual percentage yield and interest rate
Cost information, such as fees that may be charged
Information about other features such as any minimum balance amount required to earn interest or to avoid fees

To help you shop for the best accounts, an institution must give you information about any consumer deposit account the institution offers, if you ask for it. You will also get disclosures before you actually open an account.

In addition, the Truth in Savings Act generally requires that interest and fee information be provided on any periodic statements sent to you. And if you have a roll-over CD that is longer than one month, the law requires also that you get a renewal notice before the CD matures.

ATM Transactions

How do automated teller machine (ATM) and other electronic transfer transactions work?

There are various transactions that fall under the umbrella term "electronic funds transfer."

Automated Teller Machines (ATMs). You can bank electronically and get cash, make deposits, pay bills, or transfer funds from one account to another. ATM machines are used with a debit or EFT card and a code, which is often called a personal identification number or "PIN."

Point-of-Sale (POS) Transactions. Some EFT cards can be used when shopping to allow the transfer of funds from your account to the merchant's. To pay for a purchase, you present an EFT card instead of a check or cash. Money is taken out of your account and put into the merchant's account electronically.

Preauthorized Transfers. This is a method of automatically depositing to or withdrawing funds from an individual's account, when the account holder authorizes the bank or a third party (such as an employer) to do so. For example, you can authorize direct electronic deposit of wages, Social Security, or dividend payments to their accounts. Or, you can authorize financial institutions to make regular, ongoing payments of insurance, mortgage, utility or other bills.

Telephone Transfers. You can transfer funds from one account to another-from savings to checking, for example-or order payment of specific bills by phone.

People who use EFT systems are often concerned about safeguards in the system. Since there is no check-no piece of paper with information that authorizes a bank to withdraw a certain amount of money from your account and pay that amount to another person-EFT users wonder about recordkeeping, errors, and theft:

Recordkeeping. When you use an ATM to withdraw money or make deposits, or a point-of-sale terminal to pay for a purchase, you get a written receipt--much like the sales receipt you get with a cash purchase- showing the amount of the transfer, the date it was made, and other information. This receipt is your record of transfers initiated at an electronic terminal.

Your periodic bank statement must also show all electronic transfers to and from your account, including those made with debit cards, by a pre-authorized arrangement, or under a telephone transfer plan. It will also name the party to whom payment has been made and show any fees for EFT services (or the total amount charged for account maintenance) and your opening and closing balances.

Your monthly statement is proof of payment to another person, your record for tax or other purposes, and your way of checking and reconciling EFT transactions with your bank balance.

What should I do if I find an error related to an electronic fund transfer or ATM transaction?

If you believe there has been an error in an electronic fund transfer relating to your account:

Write or call your financial institution immediately if possible, but no later than 60 days from the date the first statement that you think shows an error was mailed to you. Give your name and account number and explain why you believe there is an error, what kind of error, and the dollar amount and date in question. If you call, you may be asked to send this information in writing within 10 business days.
The financial institution must promptly investigate an error and resolve it within 45 days. However, if the financial institution takes longer than 10 business days to complete its investigation, generally it must put back into your account the amount in question while it finishes the investigation. In the meantime, you will have full use of the funds in question. You should also be aware that the time periods are longer for point-of-service debit card transactions and for any EFT transaction initiated outside the United States.
The financial institution must notify you of the results of its investigation. If there was an error, the institution must correct it promptly, for example, by recrediting your account. If it finds no error, the financial institution must explain in writing why it believes no error occurred and let you know that it has deducted any amount re-credited during the investigation. You may ask for copies of documents relied on in the investigation.

What happens if my ATM card is lost or stolen?

If your credit, ATM, or debit card is lost or stolen, federal law limits your liability for charges made without your permission, but your protection depends on the type of card — and when you report the loss.

It's important to be aware of the potential risk in using an ATM or other Electronic Funds Transfer card. Note that the risks differ from those involved with credit cards. For example, with a lost or stolen credit card, your loss is limited to $50 per card if you report your card's loss after someone uses it. However, if you report it before anyone uses the card you aren't responsible for any charges you didn't authorize. That's why it is important to act quickly.

On a ATM or debit card, your liability for an unauthorized withdrawal varies depending on how quickly it is reported:

Your loss is limited to $50 if you notify the financial institution within two business days after learning of loss or theft of your card or code.
But you could lose as much as $500 if you do not tell the card issuer within two business days after learning of the loss or theft.

If you report your ATM or debit card lost or stolen before any unauthorized charges are made, your maximum loss is $0. If you do not report an unauthorized transfer that appears on your statement within 60 days after the statement is mailed to you, you risk unlimited loss on transfers made after the 60-day period. That means you could lose all the money in your account plus your maximum overdraft line of credit.

Will I be able to use my ATM card overseas?

There are now hundreds of thousands of ATMs in more than 100 countries in both major cities and more remote locations such as villages in the Peruvian Andes. Before you go however, check with your financial institution to be sure there is an ATM at your destination, especially in a developing country. You can also check online. Both Visa and Master Card have online services to pinpoint ATMs anywhere in the world.

ATM cards can be very useful to travelers. They are safer than carrying cash because card issuers often will absorb any unauthorized withdrawals if you report your card stolen or missing right away. You can withdraw cash in local currency at a better exchange rate than you can get with traveler's checks. And you have access to money after hours or on weekends when banks are closed. The down side is that the fees banks charge on ATM transactions may make it expensive to change small amounts of money.

How will I know a pre-authorized credit (such as automatic payroll deposit) has been made?

There are various ways you may be notified. Notice may be given by your employer (or whoever is sending the funds) that the deposit has been sent to your financial institution. Otherwise, a financial institution may provide notice when it has received the credit or will send you a notice only when it has not received the funds.

How do I stop a pre-authorized payment?

To stop the next scheduled payment, give your bank the stop payment order at least three business days before the payment is scheduled. You can give the order in person, over the phone or in writing. To stop future payments, you might have to send your bank the stop payment order in writing.

How do I protect my ATM and Debit Cards against fraud?

Carry only those cards that you anticipate you'll need.
Don't carry your PIN in your wallet or purse or write it on your ATM or debit card.
Never write your PIN on the outside of a deposit slip, an envelope, or other papers that could be easily lost or seen.
Carefully check ATM or debit card transactions before you enter the PIN or before you sign the receipt; the funds for this item will be fairly quickly transferred out of your checking or other deposit account.
Check your account activity frequently especially if you bank online. Hackers and scammers are rampant in today's internet world. Compare the current balance and recent withdrawals or transfers to those you've recorded, including your current ATM and debit card withdrawals and purchases and your recent checks. If you notice transactions you didn't make, or if your balance has dropped suddenly without activity by you, immediately report the problem to your card issuer. Someone may have co-opted your account information to commit fraud.
Open monthly statements promptly and compare them with your receipts. Report mistakes or discrepancies as soon as possible to the special address listed on your statement for inquiries. Under the FCBA (credit cards) and the EFTA (ATM or debit cards), the card issuer must investigate errors reported to them within 60 days of the date your statement was mailed to you.

Affluent Individuals

Charitable Contributions

How can I spot a charity scam?

These are some common-sense suggestions for avoiding rip-offs:

Try to avoid making a cash contribution. If possible make your donation using a check or money order made out to the charity-never to the individual soliciting the donation. If you do pay cash always get a receipt. Cash donations are not tax deductible without a receipt.
Ask for written descriptions of the charity's programs and/or finances.
Don't allow yourself to be pressured to donate immediately. Wait until you are sure that the charity is legitimate and deserving of a donation.

Don't forget to keep receipts, canceled checks and bank statements so you will have records of your charitable giving at tax time.
Don't be misled by a charity that resembles or mimics the name of a well-known organization--all charities should be checked out.

Before giving, check on all charities with the local charity registration office (usually a division of the state attorney's general office) and with the Better Business Bureau (BBB).

What should I watch out for with mail solicitations?

Many charities use direct mail to raise funds. While the overwhelming majority of these appeals are accurate and truthful, be aware of the following:

The mailing piece should clearly identify the charity and describe its programs in specifics. If a fund-raising appeal brings tears to your eyes but tells you nothing about the charity's functions, check it out carefully before responding.
Beware of fund-raising appeals that are disguised as bills or invoices. It is illegal to mail a bill, invoice or statement of account that is, in fact, an appeal for funds unless it has a clear and noticeable disclaimer stating that it is an appeal and that you are under no obligation to pay unless you accept the offer.

Deceptive-invoice appeals are most often aimed at businesses, not individuals. If you receive one of these, contact your local Better Business Bureau.
It is against the law to demand payment for unsolicited merchandise-e.g., address labels, stamps, bumper stickers, greeting cards, calendars, and pens. If such items are sent to you with an appeal letter, you are under no obligation to pay for or return them.
Appeals that include sweepstakes promotions should disclose that you do not have to contribute to be eligible for the prizes offered. To require a contribution would make the sweepstakes illegal as a lottery operated by mail.
Appeals that include surveys should not imply that you are obligated to return the survey.

What should I watch out for with door-to-door solicitations?

When you are approached for a contribution of time or money, ask questions -- and don't give until you're satisfied with the answers. Charities with nothing to hide will encourage your interest. Be wary of any reluctance to answer reasonable questions.

Ask for the charity's full name and address. Demand identification from the solicitor.
Ask if the contribution is tax-deductible. Contributions to tax-exempt organizations are not always tax-deductible.
Ask if the charity is licensed by state and local authorities. Registration or licensing is required by most states and some local governments.

Registration, by itself, does not mean that the state or local government endorses the charity.
Don't give in to pressure to make an immediate donation or allow a "runner" to pick up a contribution.
Statements such as "all proceeds will go to charity" may mean money left after expense-- such as the cost of fund-raising efforts-- will go to the charity. These expenses can be big ones, so check carefully.
When asked to buy candy, magazines, or tickets to benefit a charity, be sure to ask what the charity's share will be. Sometimes the organization will receive less than 20 percent of the amount you pay.

If a fundraiser uses pressure tactics-- intimidation, threats, or repeated and harassing calls or visits-call your local Better Business Bureau to report the actions.

How can I maximize my tax benefit from charitable contributions?

If a fundraiser uses pressure tactics-- intimidation, threats, or repeated and harassing calls or visits-call your local Better Business Bureau to report the actions.

When an organization claims to be tax-exempt, it does not necessarily mean contributions are deductible. "Tax-exempt" means that the organization does not have to pay federal income taxes, while "tax-deductible" means the donor can deduct contributions to the organization. The Internal Revenue Code defines more than 20 different categories of tax-exempt organizations, but only a few of these are eligible to receive contributions deductible as charitable donations.

When in doubt, call us or the IRS (800-829-1040) about the deductibility of a contribution.

If you go to a charity affair or buy something to benefit a charity (e.g., a magazine subscription or show tickets), you cannot deduct the full amount you pay. Only the part above the fair market value of the item you purchase is fully deductible.

You pay $50 for a charity luncheon worth $30. Only $20 can be deducted.

Donations made directly to needy individuals are not deductible. Contributions must be made to qualified organizations to be tax-deductible.

Contributions are deductible for the year in which they are actually paid or delivered. Pledges are not deductible they are paid.

Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution.

For text message donations, a telephone bill will meet the record-keeping requirement if it shows the name of the receiving organization, the date of the contribution, and the amount given.

To claim a deduction for contributions of cash or property equaling $250 or more you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgment requirement for all contributions of $250 or more.

What are the most tax-effective ways of donating?

There are many ways to give money to charity. In fact, much of many charities' revenues come from the "planned or deferred giving" techniques. A planned or deferred gift is a present commitment to make a gift in the future, either during your life or via your will. Aside from assuring your favorite charities of a contribution, planned or deferred giving brings with it tax benefits.

Charitable gifts by will reduce the amount of your estate that is subject to estate tax. Lifetime gifts have the same estate tax effect (by removing the assets from your estate), but might also offer a current income tax deduction.

If you have property that has significantly appreciated in value but does not bring in current income, you may be able to use one of these techniques to convert it into an income-producing asset. Further, you will be able to avoid or defer the capital gains tax that would be due on its sale -- all the while helping a charity.

Many variables affect the type of planned or deferred giving arrangement you choose, such as the amount of your income, the size of your estate and the type of asset transferred (e.g., cash, investments, real estate, retirement plan) and its appreciated value. Not all charities have the resources to be able to offer more sophisticated arrangements.

These gifts are complex, so be sure to consult with both the charity and your financial advisor to determine how to best structure your deferred gift.

Here are some examples of planned and deferred charitable gifts:

Life Insurance

You name a charity as a beneficiary of a life insurance policy. With some limitations, both the contribution of the policy itself and the continued payment of premiums may be income-tax deductible.

Charitable Remainder Annuity

You transfer assets to a trust that pays a set amount each year to non-charitable beneficiaries (for example, to yourself or to your children) for a fixed term or for the life or lives of the beneficiaries, after which time the remaining assets are distributed to one or more charitable organizations. You get an immediate income tax deduction for the value of the remainder interest that goes to the charity on the trust's termination -- even though you keep a life-income interest. In effect, you or your beneficiaries get current income for a specified period, and the remainder goes to the charity.

Charitable Remainder Unitrust

This is the same as the charitable remainder annuity trust, except the trust pays the actual income or a set percentage of the current value (rather than a set amount) of the trust's assets each year to the non-charitable beneficiaries. Here, too, you or your beneficiaries get current income for a specified period, and the remainder goes to the charity.

Charitable Lead Annuity Trust

You transfer assets to a trust that pays a set amount each year to charitable organizations for a fixed term or for the life of a named individual. At the termination of the trust, the remaining assets will be distributed to one or more non-charitable beneficiaries (for example, you or your children).

You get a deduction for the value of the annual payments to the charity. You may still be liable for tax on the income earned by the trust. You keep the ability to pass on most of your assets to your heirs. Unlike the two trusts above, the charity gets the current income for a specified period, and your heirs get the remainder.

Charitable Lead Unitrust
This is the same as the lead annuity trust, except the trust pays the actual income or a set percentage of the current value (rather than a set amount) of the trust's assets each year to the charities.

Here, too, the charity gets the current income for a specified period, and your heirs get the remainder.

Charitable Gift Annuity

You and a charity have a contract in which you make a present gift to the charity, and the charity pays a fixed amount each year for life to you or any other specified person.

Pooled Income Fund

You get an immediate income tax deduction when you contribute the funds to the pool. The deduction is based on the value of the remainder interest.

Should I make a planned or deferred gift?

When determining whether to make a planned or deferred gift to a charity, ask whether you are ready to make a commitment to invest in a charitable organization; despite the tax benefits, you will still be "out-of-pocket" after the deduction.

Some questions you should consider are:

Is the charity viable, reputable, creditable, and reliable?
Do you wish to support its programs?
Does the gift fit into your estate and family plan?

Is it wise to give my time to charity?

Volunteering your time can be personally rewarding, but it is important to consider the following factors before committing yourself.

First, make sure you are familiar with the charity's activities. Ask for written information about the charity's programs and finances.

Be aware that volunteer work may require special training devotion of a scheduled number of hours each week to the charity.

If you are considering assisting with door-to-door fund-raising, be sure to find out whether the charity has financial checks and balances in place to help ensure control over collected funds.

Although the value of your time as a volunteer is not deductible, out-of-pocket expenses (including transportation costs) are generally deductible.

How do charity thrift stores work?

There are three major types of thrift store operations:

Conduit-type shops are run by volunteer church and civic groups. These thrift stores generally distribute most of their proceeds to various charitable organizations, often community-based.
The second category of thrift operations is represented by service organizations such as The Salvation Army and Goodwill Industries. Here, the thrift stores are operated as part of their program activities through the goal of "rehabilitation through employment."
The third category involves charities that collect and sell used merchandise to raise funds for their own use. This arrangement is popular for a number of veterans organizations and other charities. Such arrangements generally work one of two ways: (1) the charity owns and operates the store, or, (2) more commonly, variously charities solicit and collect used items, which are then sold to independently managed store(s) for an agreed-upon amount.

The "fair market value" of goods donated to a thrift store is deductible as a charitable donation, as long as the store is operated by a charity. To determine the fair market value, visit a thrift store and check the "going rate" for comparable items. If you are donating directly to a "for-profit" thrift store or if your merchandise is sold on a consignment basis whereby you get a percentage of the sale, the thrift contribution is not deductible.

Remember to ask for a receipt that is properly authorized by the charity. It is up to the donor to set a value on the donated item.

If you plan to donate a large or unusual item, check with the charity first to determine if it is acceptable.

If you are approached to donate goods for thrift purposes, ask how the charity will benefit financially. If the goods will be sold by the charity to a third party, an independently managed thrift store, ask what the charity's share will be.

Sometimes the charity receives a small percentage, e.g., 5 to 20 percent of the gross, or a flat fee per bag of goods collected.

How are tickets to charitable events treated?

Dinners, luncheons, galas, tournaments, circuses, and other events are often put on by charities to raise funds. Here are some points to consider before deciding to participate in such events.

Check out the charity. The fact that you are receiving a meal or theater tickets should not justify less scrutiny.
Remember, your purchase of tickets to such events is generally not fully deductible. Only the portion of your gift above the "fair market value" of the benefit received (i.e., the meal, show, etc.) is deductible as a charitable donation. This rule holds true even if you decide to give your tickets away for someone else to use.

If you decide not to use the tickets, give them back to the charity. In order to be able to deduct the full amount paid, you must either refuse to accept the tickets or return them to the charitable organization. In this way, you will not have received value for your payment.

Make donations by check or money order out to the full name of the charity and not to the sponsoring show company or to an individual who may be collecting donations in person.
Watch out for statements such as "all proceeds will go to the charity." This can mean the amount after expenses have been taken out, such as the cost of the production, the fees for the fund-raising company hired to conduct the event, and other related expenses. These expenses can make a big difference and sometimes result in the charity receiving 20 percent or less of the price paid.

Ask the charity what anticipated portion of the purchase price will benefit the organization.
Solicitors for some fund-raising events such as circuses, variety shows, and ice skating shows may suggest that if you are not interested in attending the event, you can purchase tickets that will be given to handicapped or underprivileged children. If such statements are made, ask the solicitor how many children will attend the event, how they will be chosen, how many tickets have been already distributed to these children, and if transportation to the event will be provided for them.

Charitable Deductions

How can I find out if contributions to a particular charity are tax-deductible?

To obtain tax-exempt status under Section 501(c)(3) of the Internal Revenue Code, an organization has to file certain documents with the IRS that prove it is organized and operated for specified charitable purposes.

Organizations with 501(c)(3) status are those that the IRS considers charitable, educational, religious, scientific or literary, those that prevent cruelty to animals, and those that foster national or international sports competition.

When the IRS rules positively on an application, the organization is eligible to receive contributions deductible as charitable donations for federal income tax purposes. The charity receives a "Determination Letter" formally notifying it of its charitable status. Older charities may have a "101(6) ruling," which corresponds to Section 501(c)(3) of the current IRC. Churches and small charities with less than $5,000 of annual gross receipts (subject to the Gross Receipts test) do not have to apply to the IRS for exemption.

You can search the IRS database for a list of tax-exempt organization eligible to receive deductible contributions.

What information can I obtain from the IRS about a charity?

You can obtain three documents on a specific charity by sending a written request to the attention of the Disclosure Officer at your nearest IRS District Office. The IRS will charge a per-page copying fee for these items. To speed your request, have the full, official name of the charity, as well as the city and state location.

These three publicly available documents are:

Form 1023 - the application filed by the charity to obtain tax-exempt status.
IRS Letter of Determination - the two-page IRS letter that notifies the organization of its tax-exempt status.
Form 990 - the financial/income tax form filed with the IRS annually by the charity. Charities with a gross income of less than $25,000 and churches are not required to file this form. Among other things, Form 990 includes information on the charity's income, expenses, assets, liabilities and net assets in the past fiscal year. Form 990 also identifies the salaries of the charity's five highest-paid employees. When contacting the IRS for copies, specify the fiscal year.
If your request for information involves only Form 990, you can get a faster response by writing directly to the IRS Service Center where the charity files its return. Contact your nearest IRS office for the address of the appropriate Service Center.

The charity registration office in your state (usually a division of the state attorney general's office) may also have a copy of the charity's latest Form 990, along with other publicly available information on charities soliciting in your state.

A charity's application for tax-exempt status and its annual Form 990 must be made available for public inspection during regular business hours at the principal office of the charity and at each of its regional or district offices containing three or more employees. The charity is not required to provide photocopies of the return but must have a copy on hand for public inspection.

What types of deductible contributions can be made to charity?

Generally, you can donate money or property to charity. A deduction is usually available for the fair market value of the money or property. However, for certain property the deduction is limited to your cost basis; inventory (some exceptions), certain creative works, stocks held short term and certain business-use property. You can also donate your services to charity, however, you may not deduct the value of your services. You can deduct your travel expenses and some out of pocket expenses.

What types of organizations generally qualify for a charitable deduction?

The following types of organizations generally qualify for a deduction. Before making a donation, make sure to verify the organization's status. You can do this by asking for evidence in writing or contacting the Internal Revenue Service.

Churches, synagogues, temples, mosques, and other religious organizations.
Federal, state and local governments if the proceeds are used for public purposes.
Nonprofit schools, hospitals and volunteer fire companies.
Public parks and recreation facilities.
Salvation Army, United Way, Red Cross, Goodwill, Boy Scouts and Girl Scouts.
War veterans' groups.

What types of organizations generally do not qualify for a charitable deduction?

The following types of organizations generally do not qualify for a charitable deduction:

Social and sports clubs.
For-profit organizations.
Lottery, bingo or raffle tickets.
Dues to social or recreational clubs.
Homeowners' associations.
Individuals.
Political organizations.

What is the limit on the deductibility of charitable contributions?

The amount of your deduction for charitable contributions is limited to 50 percent of your adjusted gross income and may be limited to 20 or 30 percent of your adjusted gross income, depending on the type of property you give and the type of organization you give it to. Before you make a donation, verify with your tax advisor which limit applies.

Can I deduct contributions to tax-exempt organizations?

Not necessarily. Tax-exempt means that the organization does not have to pay federal income taxes while tax-deductible means the donor can deduct contributions to the organization. There are more than 20 different categories of tax-exempt organizations, but only a few of these offer tax-deductibility for donations.

What should I look out for in my charitable giving?

Not everything the charity gets from you qualifies for deduction:

If you go to a charity affair or buy something to benefit a charity (e.g., a magazine subscription or show tickets), you cannot deduct the full amount you pay. Only the part above the fair market value of the item you purchase is fully deductible. For example, if you pay $500 for a charity luncheon worth $200, only $300 can be deducted.
Since contributions are deductible only for the year in which they are actually paid or delivered, pledges are not deductible until they are paid.
No cash or non-cash donation is deductible unless the taxpayer has a receipt from the charity substantiating the donation.
Since contributions must be made to qualified organizations to be tax-deductible, donations made to needy individuals are not deductible.

Is federal gift or estate tax due on my charitable gift?

Charitable gifts made pursuant to your will reduce the amount of your estate that is subject to estate tax. Lifetime gifts have the same estate tax effect (by removing the assets from your estate), along with the current income tax deduction.

Some charities talk about planned or deferred giving. What is that?

Usually they are ways whereby both you (or your family) and charity enjoy your property or its income. The most popular are:

Life Insurance

You name a charity as a beneficiary of a life insurance policy. With some limitations, both the contribution of the policy itself and the continued payment of premiums may be income-tax deductible.

Charitable Remainder Trust

You transfer assets to a trust that pays an amount each year to non-charitable beneficiaries (for example, to yourself or your children) for a fixed term or for the life or lives of the beneficiaries, after which time the remaining assets are distributed to one or more charitable organizations. You get an immediate income tax deduction for the value of the remainder interest that goes to the charity on the trust's termination, even though you keep a life-income interest. In effect, you or your beneficiaries get current income for a specified period and the remainder goes to the charity.

Charitable Lead Trust

You transfer assets to a trust that pays an amount each year to charitable organizations for a fixed term or for the life of a named individual. At the termination of the trust, the remaining assets will be distributed to one or more non-charitable beneficiaries (for example, you or your children).

You get a deduction for the value of the annual payments to the charity. You keep the ability to pass on most of your assets to your heirs. Unlike the charitable remainder trusts above, the charity gets the current income for a specified period and your heirs get the remainder.

Charitable Gift Annuity

You and a charity have a contract in which you make a present gift to the charity and the charity pays a fixed amount each year for life to you or any other specified person. Your charitable deduction is the value of your gift minus the present value of your annuity.

Pooled Income Fund

You put funds into a pool that operates like a mutual fund but is controlled by a charity. You, or a designated beneficiary, get a share of the actual net income generated by the entire fund for life, after which your share of the assets is removed from the pooled fund and distributed to the charity. You get an immediate income tax deduction when you contribute the funds to the pool. The deduction is based on the value of the remainder interest.

Living Trusts

What is a living trust?

A living trust is an entity that exists only on paper (similar to a corporation) but is legally capable of owning property. However, a live person called the trustee must be in charge of the property. Furthermore, you can be the trustee of your own living trust, keeping full control over all property legally owned by the trust.

There are many kinds of trusts. A living trust (also called a revocable trust, revocable living trust, or inter vivos trust) is simply one you create while you're alive rather than one created upon your death under the terms of your will.

Property held in trust that is actually "owned" by the trustees, subject to the rights of the beneficiaries. The trust itself doesn't own anything. All living trusts are designed to avoid probate. Some also help you save on estate taxes, while others let you set up long-term property management.

What is probate?

Probate is the legal process of paying the deceased's debts and distributing the estate to the rightful heirs. This process usually entails:

The appointment of an individual by the court to act as executor of the estate. Executors are sometimes referred to as "personal representatives." Most people name an executor as part of their will. If there is no will, the court appoints an executor, most often a spouse if the deceased is married.
Proving that the will is valid.
Informing creditors, heirs, and beneficiaries that the will is probated.
Disposing of the estate by the executor in accordance with the will or state law.
The executor named in the will must file a petition with the court after the death. There is a fee for the probate process. Probating a will may require legal assistance depending on the size and complexity of the probable assets.

Assets jointly owned by the deceased and others are not subject to probate. Proceeds from a life insurance policy or Individual Retirement Account (IRA) paid directly to a beneficiary are also not subject to probate.

Do I need a living trust?

A living trust is a useful estate and tax planning document that keeps your estate out of probate court. While some people may not need one, there are several reasons why it makes sense, such as having a beneficiary who is disabled, owning property in another state, or making it easier for your heirs to administer your estate after death.

How does a living trust avoid probate?

Property you transfer into a living trust before your death doesn't go through probate. The successor trustee - the person you appointed to handle the trust after your death - simply transfers ownership to the beneficiaries you named in the trust. In many cases, the whole process takes only a few weeks, and there are no lawyer or court fees to pay. The living trust ceases to exist when the property has all been transferred to the beneficiaries.

Is it expensive to create a living trust?

The cost of creating a living trust depends on what you want to achieve. The more complicated a living trust is, the more expensive it will be. Also important to note is that while the fees associated with creating a living will are paid upfront, a living trust saves you money and time by avoiding probate court.

Is a trust document ever made public, like a will?

A will becomes a matter of public record when submitted to a probate court, as do all the other documents associated with probate - inventories of the deceased person's assets and debts, for example. However, the terms of a living trust need not be made public.

Does a trust protect property from creditors?

Holding assets in a revocable trust does not shelter those assets from creditors. A creditor who wins a lawsuit against you can go after the trust property as if you still owned it in your name.

After your death, however, property in a living trust can be quickly and quietly distributed to the beneficiaries (unlike property that must go through probate). That complicates matters for creditors; by the time they find out about your death, your property may already be dispersed, and the creditors have no way of knowing exactly what you own (except for real estate, which is always a matter of public record). It may not be worth the creditor's time and effort to track down the property and demand that the new owners use it to pay your debts.

On the other hand, probate can offer protection from creditors. During probate, known creditors must be notified of the death and given a chance to file claims. If they miss the deadline to file, they're out of luck forever.

Do I need a trust if I'm young and healthy?

Probably not. At this stage in your life, your main estate planning goals are probably making sure that in the unlikely event of your premature death, your property is distributed how you want it to be and, if you have young children, that they are cared for. You don't need a trust to accomplish those ends; writing a will and perhaps buying some life insurance is sufficient.

Can a living trust save taxes?

A simple probate-avoidance living trust does not affect either income or estate taxes. More complicated living trusts, however, can greatly reduce your federal estate tax bill if you expect your estate to owe estate tax at your death.

Your Estate and Taxes

Will my estate have to pay taxes after I die?

It depends. The federal government imposes estate taxes at your death only if your property is worth more than a certain amount based on the year of death. By some estimates, more than 99 percent of estates do not pay any estate tax. In 2023, the exemption limit is $12.92 million ($12.06 million in 2022). Estates worth more than $12.92 million are taxed at 40 percent. For married couples, the exemption is $25.84 million. There are a couple of important exceptions to the general rule, however. All property left to a spouse is exempt from the tax as long as the spouse is a U.S. citizen, and estate taxes won't be assessed on any property you leave to a tax-exempt charity.

Do states also impose estate taxes?

Most states impose estate taxes of some kind. In many cases, there's a state inheritance tax only where a federal estate tax would apply. But some states have estate taxes that are "uncoupled" from the federal tax, and some have inheritance taxes.

Your inheritors, not your estate, pay inheritance taxes. Typically, how much they pay depends on their relationship to you.

Twelve states and the District of Columbia impose an estate tax, while six states have an inheritance tax. Maryland is the only state with both an estate tax and an inheritance tax.

Estate Tax

Connecticut
District of Columbia
Hawaii
Illinois
Maine
Maryland
Massachusetts
Minnesota
New York
Oregon
Rhode Island
Vermont
Washington

Inheritance Tax
Iowa
Kentucky
Maryland
Nebraska
New Jersey
Pennsylvania

How can I minimize federal estate taxes?

There are several ways. One common way to do this is to leave your children, directly or in trust, an amount up to the estate tax exemption amount ($12.92 million in 2023) and the balance to your spouse.

Can I avoid paying state estate taxes?

In most states that base inheritance taxes on the federal estate tax, steps that avoid federal tax also avoid state tax. If your state imposes some other kind of estate tax, your professional advisor can help you minimize state tax by taking actions specifically adapted to that tax.

If you live in two states, for instance, Florida in winter and summer in New Jersey, your inheritors may be able to save on estate taxes if you make your legal residence in the state with lower inheritance taxes.

Can I just give all my property away before I die and avoid estate taxes?

You can give up to $17,000 in 2023 ($16,000 in 2022) per person per year with no gift tax liability. Gifts exceeding that amount are counted against a gift tax exemption of $12,920,000. Gifts exceeding that exemption are subject to the gift tax. At your death, these gifts could become your taxable estate (with credit for gift tax paid).

There are, however, a few exceptions to this rule. You can give an unlimited amount of property to your spouse unless your spouse is not a U.S. citizen, in which case you can give away up to $100,000 indexed for inflation; the 2023 amount is $175,000 ($164,000 in 2022) per year free of gift tax. Any property given to a tax-exempt charity avoids federal gift taxes. Money spent directly on someone's medical bills or school tuition is exempt as well.

Parents

Raising a Child

How much will it cost me to raise a child?

We can't tell you exactly what your child will cost, but we can provide you with estimates. Knowing what to expect will allow you to plan for the future. Here is a breakdown of the items you'll need, and an estimate of their costs.

These estimates are for a first child. Bear in mind that second or third children will cost less than the first since you will already have purchased many of the items you need. Typically parents with 3 or more children spend 22 percent less per child than those with just two children.

Government estimates say that a middle-income family in 2015, defined as having an annual income between $59,350 and $107,400, will spend a total of $233,610 to raise a child to age 17. This figure represents a 3.0 percent increase from the four-year period 2010-2014 to the four-year period 2011 to 2015 and does not include expenses incurred beyond the age of 18. If you include the cost of college, whether public or private, that cost goes up significantly. And, families that earn more generally can expect to spend more on their children.

According to the USDA report, Expenditures on Children by Families, 2015, annual child-rearing expenses per child for a middle-income, two-parent family ranged from $12,350 to $13,900. The age of the child accounted for the annual variations. For example, child care expenses are greater in the first 6 years of a child's life, but transportation costs are likely to be higher when a child hits her teen years.

About 30 percent of the amount spent in the government estimates goes to cover housing expenses relating to the new member of your household. Child care and education expenses account for the second highest percent. Other costs taken into account include transportation, food, clothing, health care, and miscellaneous expenses.

Married-couple families in the urban Northeast had the highest child-rearing expenses, followed by similar families in the urban West and urban South. Married-couple families in the urban Midwest and rural areas had the lowest child-rearing expenses.

What costs can I expect during the first year?

Here are the costs you can expect up to birth and during the first year.

Hospital Costs. According to 2015 report by the International Federation of Health Plans,, an uneventful hospital delivery in the United States costs, on average $10,808 and $16,106 for a cesarean section birth. The actual costs you pay, of course, vary depending on your health care coverage.
Layette. Before you bring the baby home, you'll buy a crib, a changing table, and a swing or bouncy seat. The moderately priced versions of these three things will cost you about $1,200. You'll also need at least one stroller that you can expect to pay about $400 for. A full-size infant car seat will cost you about $150-$200, and a full-size high chair will cost $150. Finally, you will spend several hundred dollars on washcloths, sheets, blankets, towels, undershirts, onesies, and other baby clothes. Also, think about whether you plan to use a diaper service, cloth diapers, or use disposable ones.
Feeding. The American Academy of Pediatrics recommends exclusively breastfeeding your baby for at least 6 months. Many women, of course, choose to breastfeed longer than that. Nursing mothers will have to invest in several good nursing bras and nursing pads (about $50) as well as a nursing pillow (about $25). If you plant to return to work after 3 months, consider investing in a hospital grade breast pump, which will run you about $400.

In comparison, a year's worth of ready-mix powder formula costs about $1,350. If you buy the ready-to-serve type of formula, the cost is, even more, running well over $2,000. You'll also need a year's supply of bottles, at about $90, and you'll have to add another $40 to replace the nipples at least twice in a year.

When your baby is ready for solid foods, you will also need to account for the cost of rice cereal and baby food.
Diapers and Gear. Diapers are another expense you need to consider. Cloth diapers are the least expensive option. Disposable diaper costs for the first year run about $850, and a diaper genie costs about $40.
Child Care. Child care in a day care center costs much less than a live-in nanny. A mid-priced day care center charges on average $975 per month for your infant's care, or close to $12,000 per year.
Child Care. Child care in a day care center costs much less than a live-in nanny. A mid-priced day care center charges on average $975 per month for your infant's care, or close to $12,000 per year.
Toys and Clothes. You'll spend about $500 on toys and clothing during the first year.
Total for the First Year. Your total expenses for the first year run about $15,000-$18,000. The biggest variable is the cost of health care.

How much will I spend on my child during ages one through six?

During these years, you'll spend about $1,000 on toys and clothes, and about $2,200 a year on food. If your child attends daycare or pre-school, add in the cost of these services. Daycare will cost you an average of $12,000 per year, while pre-school costs vary widely. Again, health care costs depend on your health coverage.

How much will I spend on my child during ages six through twelve?

This is the time when the overall expenses of child-rearing drop and families can save more. During these years, your child care expenses will drop drastically. Health care costs generally stabilize unless of course, your child begins orthodontia during this stage. Then, you'll have to pay more.

You are likely to spend more than in the previous stage on clothing, toys, and entertainment, but your kids won't be demanding the high-ticket clothing and other items of adolescence. The bill for food will be just slightly more than what it was in the previous stage.

On the negative side, now that your kids are in school, you'll want to pay for all those extras that middle-class kids have: dancing and music lessons, sports participation, and so on. And, if you decide to send your kids to private school or to summer camp, these expenses will have to be added in.

How much will I spend on my child during ages thirteen through eighteen?

During this stage, you can expect your child's food, clothing, and entertainment bill to greatly exceed what it was during the previous stage. For instance, food costs will increase as a result of growth spurts in your adolescent and clothing costs are likely to rise as well as your teen takes more of an interest in his or her appearance.

Once your teen starts driving, your auto insurance will go up. The extra cost could be anywhere from $300 to $1,000, depending on your state of residence and whether your child is a boy or girl. If you intend to buy your child a car, add this expense in as well.

How can I teach my kids good financial skills?

Once they reach school age, children should start learning rudimentary financial skills.

You might start to teach your kids in the following areas:

The Allowance. Giving your child an allowance is a good start. Whether you pay your child a quarter or one dollar to perform weekly household chores, you are instilling a work ethic and a giving them an opportunity to learn how to save and spend their money wisely. You can make suggestions to them about what they should do with it, but allow them the final say on what happens to the money. Let them see the consequences of both wise and foolish behavior with regard to money. A child who spends all of his money on the first day of the week is more likely to learn to budget if he is not provided with extras to tide him over.

Savings and Investment. Beyond the basics of budgeting and saving, you'll want to get your child involved in saving and investing. The easiest way to do this is to have the child open his or her own savings account. If you want your child to become familiar with investing, there are a number of child-friendly mutual funds and individual stocks available.

Taxes. Many teens today have part-time jobs. Although they might not make enough to need to file a tax return, encouraging them to fill out a practice tax form is a good way to have them participate in the process--and get them used to the idea of submitting yearly tax forms.

Saving for College

When should I start saving for my child's education?

This depends on how much you think your children's education will cost. The best way is to start saving before they are born. The sooner you begin the less money you will have to put away each year.

How much will my child's college education cost?

How should I invest my child's college fund?

The following are often recommended as investments for education funds:

Series EE bonds: These are extremely safe investments. They should be held in the parents' names. If the adjusted gross income of you and your spouse at the time of redemption is at or under the amount set by the tax law, the interest on bonds bought after January 1, 1990, is tax-free as long as it is used for tuition or other qualified education costs. If your adjusted gross income is above the threshold amount, the tax break is phased out.

You can exclude from your gross income interest on qualified U.S. savings bonds if you have qualified higher education expenses during the year in which you redeem the bonds. For tax year 2023, the exclusion begins phasing out at $91,850 modified adjusted gross income ($76,000 indexed for inflation) and is eliminated for adjusted gross incomes of more than $106,850. For married taxpayers filing jointly, the tax exclusion begins phasing out at $137,800 and is eliminated for adjusted gross incomes of more than $167,800. The exclusion is unavailable to married filing separately.
U.S. Government bonds: These are also investments that offer a relatively higher return than CDs or Series EE bonds. If you use zero-coupon bonds, you can time the receipt of the proceeds to fall in the year when you need the money. A drawback of such bonds is that a sale before their maturity date could result in a loss on the investment. Further, the accrued interest is taxable even though you don't receive it until maturity.
Certificates of deposit: These are safe, but usually provide a lower return than the rate of inflation. The interest is taxable. These should generally only be used by the most risk-averse investors and for relatively short investment horizons.
Municipal bonds: Assuming the bonds are highly rated, the tax-free interest on them can provide an acceptable return if you're in the higher income tax brackets. Zero-coupon municipals can be timed to fall due when you need the funds and are useful if you begin saving later in the child's life.

Be sure to convert the tax-free return quoted by sellers of such bonds into an equivalent taxable return. Otherwise, the quoted return may be misleading. The formula for converting tax-free returns into taxable returns is as follows:

Divide the tax-free return by 1.00 minus your top tax rate to determine the taxable return equivalent. For example, if the return on municipal bonds is 1 percent and you are in the 32 percent tax bracket, the equivalent taxable return is 2.6 percent (1 percent divided by 68 percent).
Stocks: An appropriate mutual fund or portfolio containing stocks can provide you with a higher yield than bonds at an acceptable risk level. Stock mutual funds can provide superior returns over the long term. Income and balanced funds can meet the investment needs of those who begin saving when the child is older.

What is the American Opportunity Tax Credit?

Amount of credit. For most taxpayers, 40 percent of the AOTC is a refundable credit, which means that you can receive up to $1,000 even if you owe no taxes.

"Related" expenses do not include room and board, student activities, athletics (other than courses that are part of a degree program), insurance, equipment, transportation, or any personal, living, or family expenses. Student-activity fees are included in qualified education expenses only if the fees must be paid to the institution as a condition of enrollment or attendance. For expenses paid with borrowed funds, count the expenses when they are paid, not when borrowings are repaid.

What is the "kiddie tax?"

In the past, parents would invest in the child's name in order to shift income to the lower-bracket child. However, the addition of the "kiddie tax" mostly put an end to that strategy.

For 2023, the net unearned income for a child under the age of 19 (or a full-time student under the age of 24) that is not subject to "kiddie tax" is $2,500.

These rules apply to unearned income. If a child has earned income, this amount is always taxed at the child's rate.

What is a Coverdell (Section 530) Education Savings Account and who is eligible for one?

For the $2,000 contribution limit, there is no adjustment for inflation and therefore, the limit is expected to remain at $2,000.

Only cash can be contributed to a Section 530 account and you cannot contribute to the account after the child reaches their 18th birthday.

If you have insufficient savings for your child's education when he is close to entering college, what should you do?

Many families find themselves in the same boat. Fortunately, there are ways to generate additional funds both now and when your child is about to enter school:

You can start saving as much as possible during the remaining years. However, unless your income level is high enough to support an extremely stringent savings plan, you will probably fall short of the amount you need.
You can take on a part-time job. However, this will raise your income for purposes of determining whether you are eligible for certain types of student aid. In addition, your child may be able to take on part-time or summer jobs.
You can tap your assets by taking out a home equity loan or a personal loan, selling assets or borrowing from a 401(k) plan.
You (or your child) can apply for various types of student aid and education loans.

What types of grants are available for college?

Grants. The best type of financial aid because they do not have to be paid back are amounts awarded by governments, schools, and other organizations. Some grants are need-based and others are not.

The Federal Pell Grant Program offers federal aid based on need.

Don't assume that middle class families are ineligible for needs-based aid or loans. The assessment of whether a family qualifies as "in need" depends on the cost of the college and the size of the family.
State education departments may make grants available. Inquiries should be made of the state agency.
Employers may provide subsidies.
Private organizations may provide scholarships. Inquiries should be made at schools.
Most schools provide aid and scholarships, both needs-based and non-needs-based.
Military scholarships are available to those who enlist in the Reserves, National Guard, or Reserve Officers Training Corps. Inquiries should be made at the branch of service.

Try negotiating with your preferred college for additional financial aid, especially if it offers less than a comparable college.

What types of loans are available for college?

There are various student loan programs available. Some are need-based, and others are not. Here is a summary of loans:

Stafford loans (formerly guaranteed student loans) are federally guaranteed and subsidized low-interest loans made by local lenders and the federal government. They are needs-based for subsidized loans; however an unsubsidized version is also available.
Perkins loans are provided by the federal government and administered by schools. They are needs-based. Inquiries should be made at school aid offices.
Parent loans for undergraduate students (PLUS) and supplemental loans for students are federally guaranteed loans by local lenders to parents, not students. Inquiries should be made at college aid offices.
Schools themselves may provide student loans. Inquiries should be made at the school.

How can I increase the amount of financial aid my child is entitled to?

Here are some strategies that may increase the amount of aid for which your family is eligible:

Try to avoid putting assets in your child's name. As a general rule, education funds should be kept in the parents' names, since investments in a child's name can impact negatively on aid eligibility. For example, the rules for determining financial aid decrease the amount of aid for which a child is eligible by 35 percent of assets the child owns and by 50 percent of the child's income.

If your child owns $1,000 worth of stock, the amount of aid for which he or she is eligible for is reduced by $350. On the other hand, the amount of aid is reduced by (effectively) only 5.6 percent of your assets and from 22 to 47 percent of your income.
Reduce your income. Income for financial aid purposes is generally determined based upon your previous year's income tax situation. Therefore, in the years immediately prior to and during college, try to reduce your taxable income. Some ways to do this include:

1. Defer capital gains.

2. Sell losing investments.

3. Reduce the income from your business. If you are the owner of your own business, you may be able to reduce your taxable income by taking a lower salary, deferring bonuses, etc.

4. Avoid distributions from retirement plans or IRAs in these years.

5. Pay your federal and state taxes during the year in the form of estimated payments rather than waiting until April 15 of the following year.

6. Since a portion of discretionary assets is included in the family's expected contribution from income, reduce discretionary assets by paying off credit cards and other consumer loans.

7. Take advantage of vehicles which defer income, such as 401(k) plans, other retirement plans or annuities.
Detail any financial hardships. If you have any financial hardships, let the deciding authorities know (via the statement of financial need) exactly what they are if they are not clear from the application. The financial aid officer may be able to assist you in explaining hardships.
Have your child become independent. In this case, your income is not considered in determining how much aid your child will be eligible for. Students are considered independent if they:

1. Are at least 24 years old by the end of the year for which they are applying for aid

2. Are veterans

3. Have dependents other than their spouse

4. Are wards of the court or both parents are deceased

5. Are graduate or professional students

6. Are married and are not claimed as dependents on their parents' returns

How can I save taxes on college savings?

If you decide to invest in your child's name, here are some tax strategies to consider:

You can shift just enough assets to create $2,500 in 2023 taxable income to an under age 19, child.
You can buy U.S. Savings Bonds (in the child's name) scheduled to mature after your child reaches age 18.
You can invest in equities that pay small dividends but have a lot of potential for appreciation. The dividend income earned when your child is under the age of 19 will be minimal with tax relief, and the growth in the stocks will occur over the long term.
If you own a family business, you can employ your child in the business. Earned income is not subject to the "kiddie tax," and is deductible by the business if the child is performing a legitimate function. Additionally, if your business is a sole proprietorship and your child is younger than 19 years old, then he or she will not pay social security taxes on the income.

"Nanny Tax" Rules

What kinds of household workers are covered by nanny tax rules?

Household workers include anyone who does work in or around your home such as babysitters, nannies, health aides, private nurses, maids, caretakers, yard workers, and similar domestic workers. In addition, the worker must be your employee, which means you can control not only what work is done, but how it is done.

It does not matter whether the work is full-time or part-time, or that you hired the worker through an agency. On the other hand, if only the worker can control how the work is done, the worker is not your employee, but is self-employed.

What must I do if I think my worker or worker-to-be isn't a U.S. citizen?

It is unlawful for you to knowingly hire or continue to employ an alien who cannot legally work in the United States.

When you hire a household employee to work for you on a regular basis, he or she must complete the employee part of the Immigration and Naturalization Service (INS) Form I-9, Employment Eligibility Verification. You must verify that the employee is either a U.S. citizen or an alien who can legally work here and then complete the employer part of the form. Keep the completed form for your records.

What are my tax duties if I have a household employee?

You may need to withhold and pay Social Security and Medicare taxes, or you may need to pay federal unemployment tax, or you may need to do both.

If you pay cash wages of $2,800 or more in 2025 ($2,700 or more in 2024) to any one household employee, withhold and pay Social Security and Medicare taxes.
If you pay total cash wages of $1,000 or more in any calendar quarter during the current calendar year or the prior year to household employees, you must pay unemployment tax.

If I hire teenagers as babysitters or for yard work, must I withhold and pay tax for them?

When figuring whether you paid an employee $2,800 or more in 2025 ($2,700 or more in 2024) to babysitters or others, you generally don't count wages paid to an employee who is under age 18 at any time during the year.

If the employee is a student, providing household services is not considered his or her principal occupation. However, you should count these wages if providing household services is the employee's principal occupation.

Are there ways to pay my household employee that minimize the employment tax?

Wages subject to employment tax do not include the value of food, lodging, clothing, and other non-cash items you give your household employee. However, cash you give your employee in place of these items is included in wages.

If you reimburse the amount your employee pays to commute to your home by public transit (bus, train, etc.), do not count reimbursements up to $325 per month in 2025 ($315 per month in 2024) as wages.

Further, if you reimburse your employee for the cost of parking at or near a location from which your employee commutes to your home, do not count reimbursements up to $325 per month in 2025 ($315 per month in 2024) as wages.

I'm not sure yet whether I'll pay enough this year to require withholding. What should I do?

You should withhold the employee's share of Social Security and Medicare taxes if you expect to pay your household employee Social Security and Medicare wages of $2,800 or more in 2025 ($2,700 or more in 2024).

If you withhold the taxes but then actually pay the employee less than $2,800 in 2025 ($2,700 in 2024) in Social Security and Medicare wages for the year, you should repay the employee.

Okay, I've withheld tax on the employee and I owe the employer's share. How do I pay these amounts?

You pay withheld taxes as part of your regular income tax obligation. You don't deposit them periodically. If you make an error by withholding too little, you should withhold additional taxes from a later payment. If you withhold too much, you should repay the employee.

Do I have to reduce the worker's take-home pay by the tax on that pay?

If you prefer to pay your employee's Social Security and Medicare taxes from your own funds, you do not have to withhold them from your employee's wages. The Social Security and Medicare taxes you pay to cover your employee's share must be included in the employee's wages for income tax purposes. However, they are not counted as Social Security and Medicare wages or as federal unemployment (FUTA) wages.

In what cases do I owe unemployment tax?

The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. You may owe only the FUTA tax or only the state unemployment tax, or both. To find out whether you will owe state unemployment tax, contact your state's unemployment tax agency.

If you pay cash wages to household employees totaling $1,000 or more in any calendar quarter of the current calendar year or the prior year, the first $7,000 of cash wages you pay to each household employee in the current calendar year are FUTA wages. If you pay less than $1,000 cash wages in each calendar quarter of the current calendar year but you had a household employee in the prior calendar year, the cash wages you pay in the current calendar year may still be FUTA wages. They are FUTA wages if the cash wages you paid to household employees in any calendar quarter of the current calendar year or the prior year totaled $1,000 or more.

Do not withhold the FUTA tax from your employee's wages. You must pay it from your own funds.

Do I need to withhold federal income tax?

You are not required to withhold federal income tax from wages you pay a household employee. You should withhold federal income tax only if your household employee asks you to withhold it and you agree. The employee must give you a completed Form W-4, Employee's Withholding Allowance Certificate. If you agree to withhold federal income tax, you are responsible for paying it to the IRS.

You figure federal income tax withholding on both cash and non-cash wages you pay. Measure non-cash wages by the value of the non-cash item. Do not count as wages any of the following items:

Meals provided at your home for your convenience.
Lodging provided at your home for your convenience and as a condition of employment.
Up to $325 per month in 2025 ($315 per month in 2024) for bus or train tokens (passes) you give your employee, or in some cases for cash reimbursement you make for the amount your employee pays to commute to your home by public transit.
Up to $325 per month in 2025 ($315 per month in 2024) to reimburse your employee for the cost of parking at or near your home or at or near a location from which your employee commutes to your home.
Any income tax you pay for your employee without withholding it from the employee's wages must be included in the employee's wages for federal income tax purposes. It is also counted as Social Security, Medicare, and FUTA wages.

What about Earned Income Credit (EIC)? What must I do?

Certain workers can take the earned income credit (EIC) on their federal income tax return. This credit reduces their tax or allows them to receive a payment from the IRS if they do not owe tax. You must give your household employee a notice about the EIC if you agree to withhold federal income tax from the employee's wages and the income tax withholding tables show that no tax should be withheld. Even if not required, you are encouraged to give the employee a notice about the EIC if his or her 2025 wages are less than $68,675 ($66,819 for 2024).

The employee's copy (Copy B) of the IRS Form W-2,Wage and Tax Statement has a statement about the EIC on the back. If you give your employee that copy by January 31 (as discussed under Form W-2), you do not have to give the employee any other notice about the EIC.

What federal tax forms must I file if I have a household employee?

Form W-2 and Schedule H of Form 1040. Specifically:

A separate Form W-2, Wage and Tax Statement, must be filed for each household employee to whom you pay Social Security and Medicare wages or wages from which you withhold federal income tax. Give Copies B, C, and 2 to your employee by January 31, and send Copy A of Form W-2 with Form W-3, Transmittal of Wage and Tax Statements, to the Social Security Administration by January 31.
Use Schedule H (Form 1040), Household Employment Taxes, to report the federal employment taxes for your household employee if you pay the employee Social Security and Medicare wages, FUTA wages, or wages from which you withhold federal income tax.
File Schedule H with your federal income tax return. If you are not required to file a tax return, file Schedule H by itself.

Avoiding Scams

How can I spot a rip-off?

By taking the following precautions, you can spot a scam and avoid being ripped off.

Don't allow yourself to be pushed into a hurried decision. At least 99 percent of everything that's a good deal today will still be a good deal a week from now.
Always request written information, by mail, about the product, service, investment or charity and about the organization that's offering it.
Don't make any investment or purchase you don't fully understand. Swindlers try to convince individuals that they are making an informed decision.
Ask what state or federal agencies the firm is regulated by, and contact the agency. If the firm says it's not subject to any regulation, you may want to act cautiously.
If an investment or major purchase is involved, request that information also be sent to your accountant, financial advisor, banker, or attorney for evaluation and an opinion.
Before you make a final financial commitment, ask for a copy of the refund policy and make sure it's in writing.
Beware of testimonials that you may have no way of checking out.
Never provide your credit card number and bank account information over the phone.
If necessary, hang up or walk away. If you hear your own better judgment whispering that you may be making a serious mistake, just say good-bye.

What should I know about Internet fraud?

Internet crime such as identity theft and online fraud exceeded $10.3 billion in losses in 2022 according to an Internet Crime Complaint Center (IC3) estimate. It only gets worse every year and underscores the fact that both legitimate businesses and scam artists alike have equal access to the Internet. Among the 2022 complaints received, ransomware, business e-mail compromise (BEC) schemes, and the criminal use of cryptocurrency are among the top incidents reported, according their 2022 annual report.

How can you avoid being snared by Internet fraud? Simple. If it sounds too good to be true, it is. Claims of "quick profits", "guaranteed returns", "double your investment", or "risk-free investment" probably indicate a fraudulent investment.

What are some of the Internet scams I should watch out for?

New scams appear every year, but usually with the same themes. Here are a few of them:

Refund Scam. This is the most frequent IRS-impersonation scam seen by the IRS. In this phishing scam, a bogus email claiming to come from the IRS tells the consumer that he or she is eligible to receive a tax refund for a specified amount. It may use the phrase "last annual calculations of your fiscal activity."

To claim the tax refund, the consumer must open an attachment or click on a link contained in the e-mail to access and complete a claim form. The form requires the entry of personal and financial information. Several variations on the refund scam have claimed to come from the Exempt Organizations area of the IRS or the name and signature of a genuine or made-up IRS executive. In reality, taxpayers do not complete a special form to obtain their federal tax refund because refunds are triggered by the tax return they submitted to the IRS.

Lottery winnings or cash consignment. These advance fee scam e-mails claim to come from the Treasury Department to notify recipients that they'll receive millions of dollars in recovered funds or lottery winnings or cash consignment if they provide certain personal information, including phone numbers, via return e-mail. The e-mail may be just the first step in a multi-step scheme, in which the victim is later contacted by telephone or further e-mail and instructed to deposit taxes on the funds or winnings before they can receive any of it.

Alternatively, they may be sent a phony check of the funds or winnings and told to deposit it but pay 10 percent in taxes or fees. Thinking that the check must have cleared the bank and is genuine, some people comply. However, the scammers, not the Treasury Department, will get the taxes or fees. In reality, the Treasury Department does not become involved in notification of inheritances or lottery or other winnings.

Romance Scams. Scammers sometimes use online dating and social networking sites to try to convince people to send money in the name of love. In a typical scenario, the scam artist creates a fake profile, gains the trust of an online love interest, and then asks that person to wire money, typically to a location outside the United States.

Warning signs of a romance or online dating scam include wanting to leave the dating site immediately and use personal e-mail or IM accounts, claiming feelings of instant love, planning to visit, but being unable to do so because of a tragic event, and asking for money to pay for travel, visas or other travel documents, medication, a child or other relative's hospital bills, recovery from a temporary financial setback, or expenses while a big business deal comes through.

How can I prevent the illegal use of my credit card or Social Security number?

Criminals and con artists use many scams to target unsuspecting people who have access to money. Consumer scams happen on the phone, through the mail, e-mail, or over the internet. They can occur in person, at home, or at a business.

The Consumer Financial Protection Bureau (CFPB) is a U.S. government agency that makes sure banks, lenders, and other financial companies treat you fairly, suggests these six tips for consumers to protect themselves from scams:

Don't share account numbers or passwords for bank accounts, credit cards, or Social Security.
Never pay upfront for a promised prize. It’s a scam if you are told that you must pay fees or taxes to receive a prize or other financial windfall.
After hearing a sales pitch, take time to compare prices. Ask for information in writing and read it carefully.
Too good to be true? Ask yourself why someone is trying so hard to give you a "great deal." If it sounds too good to be true, it probably is.
Watch out for deals that are only "good today" and that pressure you to act quickly. Walk away from high-pressure sales tactics that don't allow you time to read a contract or get legal advice before signing. Also, don't fall for the sales pitch that says you need to pay immediately, for example by wiring the money or sending it by courier.
Put your number on the National Do Not Call Registry. Go to Do Not Call Registry or call (888) 382-1222.

"Application fraud" occurs when a thief uses your name, Social Security number, address, and, perhaps, credit references to apply for credit. They can get much of this information from public sources (e.g., Who's Who Directories), from someone who has access to credit files (e.g., employees of car dealerships, department stores, or credit bureaus), from personal checks, or from stolen wallets.

Another form of application fraud involves the interception of the preapproved credit card offers in the mail. The thief fills out the application and either changes the address or steals the credit card out of your mailbox when it arrives at your address.

If you find a bill that you do not believe belongs to you on your credit report, check it out immediately. First, contact the creditor to find out if they have an account in your name. Ask to see a copy of the original application if they say you do.

How trustworthy are "credit clinics" and other organizations that claim to help me out of financial trouble?

Consumers with credit problems have paid millions of dollars to firms that claim they can "remove negative information," "clean up credit reports," and allow consumers to get credit no matter how bad the credit history. Consumers should beware of the following promises by credit clinics:

"Based on little-known loopholes in Federal credit laws, we can show you how to clean up your credit report!"

The loopholes are the provisions of the Fair Credit Reporting Act (FCRA), under which you have the right to challenge information in your credit report you believe incorrect.
"We can show you how to remove negative information from your file including judgments."

No matter how quickly you may pay off outstanding bills, creditors are under no obligation to remove negative information from your file.
"We can get you a major credit card even if you've been through bankruptcy!"

You will have to "secure" the card first by putting a deposit in the bank and getting a bank card with a credit limit based on a percentage of that deposit. Why should you pay the credit clinic just to provide an application and deposit slip?

Check with your state attorney general's office to determine if your state has laws that protect consumers against credit clinics and contact your state Attorney General, consumer protection agency, or Better Business Bureau to check an organization's reputation.

How honest are ads touting "federal government surplus" sales?

Advertisements touting access to little-known sources of federal government property are simply selling the names and addresses of the federal government agencies, which you can get from the federal government or by contacting the agency's local or regional office. Furthermore, the information sold by these businesses may not be accurate or up-to-date. Information about federal sales programs is available for free or at low cost from the federal government by visiting: Government Sales and Auctions.

How can I protect myself from penny stock scams?

Penny stocks are common shares of small public companies that trade at less than $1.00 per share. They are considered to be highly speculative and high risk and are traded over the counter and are prime targets for price manipulation. Here is how a penny stock scam might operate:

Mrs. G got a call from Mr. S, who told her he wanted to help her out with a "little-known" investment bonanza. These penny stocks' prices could rise by 25 percent in a few months. After she was told to act before the opportunity vanished, Mrs. G invested $5,000 in the penny stocks. Result: She is still trying to get back her $5,000.

Although she was told during the first few weeks that the stock was going up, within a month the seller was not returning her phone calls. She could not check the price of the stock because penny stocks are not traded on an exchange, but over-the-counter.

Further, the price of the penny stock was not published anywhere. Mr. S's company was the only seller of these particular penny stocks and had been engaging in price manipulation. Eventually, Mrs. G. turned the case over to her attorney. Half of her $5,000 went in the markup of the penny stock's actual price and hidden commissions.

Penny stocks can be a legitimate investment opportunity if you learn to be alert, but with the proliferation of the Internet, these stocks are often quite risky for the average investor. Learn the following warning signs investigate before you invest.

Warning Sign #1: Unsolicited Telephone Calls
Beware of a salesperson who promises you quick profits with little or no risk.

Warning Sign #2: High-Pressure Sales Tactics

These tactics include the following statements by a salesperson:

The salesperson has "inside" information on a stock and that you should purchase now, before the information becomes public
For only for a short period of time, a stock sells at a special or below market price
Due to a series of increases in a stock's price, you should purchase immediately
You may buy a particular stock only if you agree to buy stock of another company

Warning Sign #3: Inability to Sell Your Stock and Receive Cash

Fraudulent penny stock brokers may become inaccessible when you want to sell, or they may refuse to sell your stock unless you buy another one.

How can I protect myself from a pyramid scheme?

The best way to protect yourself is to understand how pyramid schemes operate, as this example shows:

Frank L. was phoned by a friend and offered an opportunity to "get in on the ground floor" of a business involving selling products to the public. He was told he would get a 50 percent return on his money within a month and how his friend had made thousands of dollars on a $1,000 investment. Frank L. quickly accepted the offer and gave his friend $1,000 to buy a "distributorship" in this business.

What Frank didn't know was that his friend had fallen victim to a pyramid scheme. Such schemes work as follows: A promoter offers investors "distributorships" at $1,000 each. The distributorships give the investor the right to sell other distributorships to friends and neighbors for $1,000 each, and also a right to sell some sort of product. Whenever an investor sells a $1,000 distributorship, he or she must give a percentage, usually half, to the promoter, and can keep the rest.

The tricky thing about pyramid schemes is that, for the first ten or twenty investors, they work. But, the pyramid scheme could continue to provide returns only in a world where there are infinite numbers of investors willing to invest $1,000, and willing (and able) to sell distributorships to others. Returns depend totally on new investors making an investment rather than on any business venture.

Result: Because Frank had no sales ability, he was unable to unload even one distributorship, and thus the $1,000 was lost. He is currently trying to get his money back and has reported the investment to the SEC.

How can I protect myself from a Ponzi scheme?

Named for Charles A. Ponzi, who defrauded hundreds of investors in the 1920s, a Ponzi scheme pays off old "investors" with money coming in from new "investors."

Investor A gives Promoter ("P") $1,000 on P's promise to repay $1,000 plus $100 "interest" in 90 days. During the 90 days, P makes similar promises to Investors B and C, receiving $1,000 each from them. At the end of the first 90 day period, P may offer to pay A the $100 "interest" and to return the original $1,000.

More likely, he will invite A to "re-invest" the $1000 plus the $100 "interest" for a similar, or higher, return at the end of another 90 days. Thereafter, A, believing s/he can receive a good return on the investment, is likely to bring other investors to P.

P collects a pool of money that he pays out to those wishing a return on their invested money. Eventually, P. either disappears with all the "investments" or reveals that the investments went "sour."

A major factor in the eventual collapse of a Ponzi scheme is that there is no significant source of "income" other than from new investors.

How can I protect myself from travel scams?

Since travel services usually have to be paid for in advance, disreputable individuals and companies try to sell travel packages turn out to be different from what was presented. If you receive an offer by phone or mail for a free or extremely low-priced vacation trip to a popular destination (often Hawaii or Florida), there are a few things you should look for:

Does the price seem too good to be true? If so, it probably is.
Are you asked to give your credit card number over the phone?
Are you pressured to make an immediate decision?
Is the carrier simply identified as "a major airline", or does the representative offer a collection of airlines without being able to say which one you will be on?
Is the representative unable or unwilling to give you a street address for the company?
Finally, you are told you can't leave for at least two months? (The deadline for disputing a credit card charge is within 60 days of the charge appearing on your credit card statement and most scam artists know this.)
If you encounter any of these symptoms, ask for written information and time to think it over. If they say no, this probably isn't the trip for you. Furthermore, if you are told that you've won a free vacation, make sure you don't have to buy expensive hotel arrangements in order to get it.

If you are seriously considering the vacation offer, compare it to what you might obtain elsewhere. The appeal of free airfare or free accommodations often disguises the fact that the total price exceeds that of a regular package tour. Get written confirmation of the departure date. If the package involves standby or waitlist travel, or a reservation that can only be provided much later, ask if your payment is refundable if you want to cancel. If the destination is a beach resort, ask the seller how far the hotel is from the beach. Then ask the hotel.

Determine the complete cost of the trip in dollars, including all service charges, taxes, processing fees, etc. If you decide to buy the trip, paying by credit card gives you certain legal rights to pursue a chargeback (credit) if promised services aren't delivered.

When buying a used car, how can I avoid buying a "lemon?"

Laundered lemons-used cars with serious defects, sold to unsuspecting new buyers are still being sold in alarming numbers. To avoid buying a "laundered lemon", take these steps.

Do your research. Check Consumer Reports and Edmunds online. Both publish car reviews and are good sources for finding out whether a vehicle is reliable and has been trouble-free.

Check for defects, repairs, and recalls. Visit the federal government's databases to find out whether the vehicle (make and model) you're interested in has been recalled, as well as service bulletins, safety investigations, and owner complaints. Check with your local dealer's service department to verify that the problem (if there was one) was taken care of.

Inspect the Vehicle. Conduct a thorough visual inspection inside and out. Look for signs of rust, mildew on carpeting, fluid leaks, bodywork repairs such as mismatched paint, and wear on tires. With the engine running check the exhaust smoke color and smell. Verify that the horn and lights are all working properly. Finally, have a reliable mechanic look it over. While it might cost a few bucks, he will be able to spot things you can't.

Vehicle History Report. If you know the car's VIN (Vehicle Identification Number), visit CarFax and enter it into their database to obtain a vehicle history report. The report will show you whether there are title problems, what the ownership history of the vehicle is, service records, and whether the vehicle has been involved in any accidents. The VIN is located on the driver's side dashboard.

Also consider the following:

Beware of used cars with low mileage. These may be described as demo models or program cars, but may in fact be lemons.
Try to get in touch with the previous owner, via the car's title. In some states, the title will tell you whether the car was a lemon-law vehicle.
Beware of cars that come from another state.

How can I avoid being ripped off by auto mechanics?

It is estimated that anywhere from one-quarter to one-half of the $90 billion Americans spend every year on car repairs is wasted on the following scams:

Only dealerships can perform maintenance. This is not true. As long as you keep thorough records and the mechanic uses the correct fluids for your make and model, car maintenance can be performed by any mechanic without affecting your warranty. The only dealership-required service is warranty-related repairs and recalls.
XYZ part will cost you $900. If a mechanic tells you that you need an extensive repair or any large component, get a second opinion or two.
Being charged to replace different parts to fix the same problem. This usually indicates that the mechanic is having trouble diagnosing the problem. That may be the case, but you shouldn't be charged for it.
The Secret Warranty. Always ask a dealership service department whether a problem is covered by a manufacturer's warranty. (A manufacturer that discovers a widespread defect will often notify a dealership that repairs of the defect will be covered by the manufacturer.) There are only five states - California, Connecticut, Maryland, Virginia, and Wisconsin - in which it is illegal for a dealership not to tell you a repair is covered by a warranty.
If the defect is safety-related, you can call 800-424-9393 for a list of warranties and recalls or visit SaferCar.gov
Flushing the engine. In general, the engine doesn't need to be flushed except for routine coolant replacement associated with normal maintenance.
The $9.95 Tune-Up. A common scam is to lure customers with an extremely low-priced oil-change or other service deal, and then to discover nonexistent problems while the car is on the lift.
Double Billing. You might be told, for example, that you need repairs done on your brakes, and then discover that you have been billed for several extra items, which are actually part of the brake repair job.

How can I avoid being pick-pocketed?

These tips on how to avoid becoming the victim of a con artist or pickpocket are provided by the New York City Police Department's Special Frauds Squad.

Use handbags that have a zipper and locking flap and carry them securely with the flap side close to your body.
Carry wallets inside your coat or side trouser pockets, never in your back pants pocket.
Beware of loud arguments or commotions in crowded areas. Thieves working together may stage these incidents to distract you while your pocket is picked.
Be aware that a pickpocket may bump or crowd you on public transportation.
If your pocket is picked, call out immediately to warn the driver or conductor. Alert everyone that there's a pickpocket on board, and don't be afraid to shout.
Avoid crowding in the area of the subway car doors when entering or exiting.
Be on guard if a stranger directs your attention to a substance or stain on your clothes.
Be on guard while doing your banking at an automatic teller machine.
Be suspicious if you are approached by a stranger who claims to have just found an envelope full of money or tells you he has a winning lottery ticket with him. This could be the first step in a confidence crime, with you as the victim. Never discuss your personal finances with strangers, and don't draw money out of the bank at a stranger's suggestion in order to build trust in such a situation

Being aware of the most current scams is the best way to prevent falling prey to them. If you or someone you know has been a victim of a con artist, call your local police precinct immediately.

Taxes

Tax Saving Strategies

What's the best way to borrow to make consumer purchases?

Under the Tax Cuts and Jobs Act, for tax years 2018 through 2025, interest on home equity loans is only deductible when the loan is used to buy, build or substantially improve the taxpayer's home that secures the loan. Prior to 2018, interest on up to $100,000 of home equity loan debt used for any purpose was tax deductible -- unlike other consumer-related interest expenses (e.g., car loans and credit cards).

What special deductions can I get if I'm self-employed?

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Can I ever save tax by filing a separate return instead of jointly with my spouse?

You sometimes may benefit from filing separately instead of jointly. Consider filing separately if one spouse has large medical expenses deductions, or casualty losses and the spouses' incomes are about equal.

Separate filing may benefit such couples because each spouse's adjusted gross income (AGI) "floor" for taking the deduction will be computed separately. (If medical expenses not paid via tax-advantaged accounts or reimbursable by insurance exceed 7.5% of your AGI, you can claim an itemized deduction for the amount exceeding that floor.)

Why should I participate in my employer's cafeteria plan or FSA?

Medical and dental expenses are deductible to the extent they exceed 7.5% of your adjusted gross income (AGI) and only if you itemize deductions rather than claiming the standard deduction. So you might not be able to benefit from this deduction. If your employer offers a Flexible Spending Account (FSA), Health Savings Account, or cafeteria plan, these plans permit you to redirect a portion of your salary to pay these expenses with pretax dollars.

What's the best way to give to charity?

If you're planning to make a charitable gift, giving appreciated long-term capital assets generally makes more sense instead of selling the assets and giving the charity the after-tax proceeds. Donating the assets instead of the cash avoids capital gains tax on the sale, and you can obtain a tax deduction for the full fair-market value of the property.

I have a large capital gain this year. What should I do?

If you also have an investment on which you have an accumulated loss, it may be advantageous to sell it before year-end. Capital gains losses are deductible up to the amount of your capital gains plus $3,000 ($1,500 for married filing separately). If you are planning on selling an investment on which you have an accumulated gain, it may be best to wait until after the end of the year to defer payment of the taxes for another year (subject to estimated tax requirements).

What other tax-favored investments should I consider?

For growth stocks you hold for the long term, you pay no tax on the appreciation until you sell them. No capital gains tax is imposed on appreciation at your death.

Interest on state or local bonds ("municipals") is generally exempt from federal income tax and tax by the issuing state or locality. Therefore, interest paid on such bonds is somewhat less than that paid on commercial bonds of comparable quality. However, for individuals in higher brackets, municipal bonds' rate of return may be higher than the after-tax rate of return for higher-interest commercial bonds.

For high-income taxpayers who live in high-income-tax states, investing in Treasury bills, bonds, and notes can pay off in tax savings. The interest on Treasuries is exempt from state and local income tax.

What tax-deferred investments are possible if I'm self-employed?

Consider setting up and contributing as much as possible to a retirement plan. These are allowed even for a sideline or moonlighting business. Several plans are available, such as an individual or self-employment 401(k) plan, a Simplified Employee Pension (SEP) and a SIMPLE IRA.

How can I make tax-deferred investments?

Through tax-deferred retirement accounts, you can invest some of the money you would have otherwise paid in taxes to increase the amount of your retirement fund. Many employers offer plans where you can elect to defer a portion of your salary and contribute it to a tax-deferred retirement account. For most companies, these are known as 401(k) plans. For many other employers, such as nonprofit organizations, a similar plan called a 403(b) is available.

Some employers match a portion of employee contributions to such plans. If this is available, you should structure your contributions to receive the maximum employer-matching contribution.

What can I do to defer income?

If you are due a bonus at year-end, you may be able to defer receipt of these funds until January. This can defer the payment of taxes (other than the portion withheld) for another year. If you're self-employed, defer sending invoices or bills to clients or customers until after the new year begins. You can also defer some of the tax, subject to estimated tax requirements.

You can achieve the same effect of short-term income deferral by accelerating deductions, for example, paying a state-estimated tax installment in December instead of the following January due date. But through 2025, watch out for the TCJA's $10,000 limit on the state and local tax deduction ($5,000 for separate filers).

Why should I defer income to a later year?

Most individuals are in a higher tax bracket in their working years than during retirement. Deferring income until retirement may result in paying taxes on that income at a lower rate. Deferral can also work in the short term if you expect to be in a lower bracket in the following year or if you can take advantage of lower long-term capital gains rates by holding an asset a little longer.

Recordkeeping For Your Taxes

What pieces of paper do I need to keep in order to do my taxes?

Keep detailed records of your income, expenses, and other information you report on your tax return. A good set of records can help you save money when you do your taxes and will be your trusty ally in case you are audited.

There are several types of records that you should keep. Most experts believe it's wise to keep most types of records for at least seven years, and some you should keep indefinitely.

What type of records do I need to keep?

Keep records of all your current year income and deductible expenses. These are the records that an auditor will ask for if the IRS selects you for an audit.

Here's a list of the kinds of tax records and receipts to keep that relate to your current year income and deductions:

Income (wages, interest/dividends, etc.)
Exemptions (cost of support)
Medical expenses
Taxes
Interest
Charitable contributions
Child care
Business expenses
Professional and union dues
Uniforms and job supplies
Education, if it is deductible for income taxes
Automobile, if you use your automobile for deductible activities, such as business or charity
Travel, if you travel for business and are able to deduct the costs on your tax return

While you're storing your current year's income and expense records, be sure to keep your bank account and loan records too, even though you don't report them on your tax return. If the IRS believes you've underreported your taxable income because your lifestyle appears to be more comfortable than your taxable income would allow, having these loan and bank records may be just the thing to save you.

How long should I keep these records?

Keep the records of your current year's income and expenses for as long as you may be called upon to prove the income or deduction if you're audited.

For federal tax purposes, this is generally three years from the date you file your return (or the date it's due, if that's later), or two years from the date you actually pay the tax that's due, if the date you pay the tax is later than the due date. IRS requirements for record keeping are as follows:

You owe additional tax and situations (2), (3), and (4), below, do not apply to you; keep records for 3 years.
You do not report income that you should report, and it is more than 25 percent of the gross income shown on your return; keep records for 6 years.
You file a fraudulent return; keep records indefinitely.
You do not file a return; keep records indefinitely.
You file a claim for credit or refund* after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.
You file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years.
Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

Should I keep my old tax returns? If so, for how long?

Yes, keep your old tax returns.

One of the benefits of keeping your tax returns from year to year is that you can look at last year's return while preparing this year's. It's a handy reference and reminds you of deductions you may have forgotten.

Another reason to keep your old tax returns is that there may be information in an old return that you need later.

Audits and your old tax returns

Here's a reason to keep your old returns that may surprise you. If the IRS calls you in for an audit, the examiner will more than likely ask you to bring your tax returns for the last few years. You'd think the IRS would have them handy, but that's not the way it works. More than likely, your old returns are stored in a computer, in a storage area, or on microfilm somewhere. Usually, your IRS auditor has just a report detailing the reason the computer picked your return for the audit. So having your old returns allows you to easily comply with your auditor's request.

How long should I keep my old tax returns?

You may want to keep your old returns forever, especially if they contain information such as the tax basis of your house. Probably, though, keeping them for the previous three or four years is sufficient.

If you throw out an old return that you find you need, you can get a copy of your most recent returns (usually the last six years) from the IRS. Ask the IRS to send you Form 4506, Request for Copy or Transcript of Tax Form. When you complete the form, send it, with the required small fee, to the IRS Service Center where you filed your return.

What other types of tax records should I keep?

You need to keep some other types of tax records and receipts because they tell you how much you paid for something that you may later sell.

Keep the following types of records:

Records of capital assets, such as coin and antique collections, jewelry, stocks, and bonds.
Records regarding the purchase and improvements to your home.
Records regarding the purchase, maintenance, and improvements to your rental or investment property.
How long should I keep these records? You need to keep these records as long as you own the item so you can prove the cost you use to figure your gain or loss when you sell the item.

Are there any non-tax records I should keep?

There are other records you should keep, even though they don't appear to have any use for your tax returns. Here are a few examples:

Insurance policies, to show whether you were to be reimbursed in case you suffer a casualty or theft loss, have medical expenses, or have certain business losses.
Records of major purchases, in case you suffer a casualty or theft loss, contribute something of value to a charity or sell it.
Family records, such as marriage licenses, birth certificates, adoption papers, divorce agreements, in case you need to prove change in filing status or dependency exemption claims.
Certain records that give a history of your health and any medical procedures, in case you need to prove that a certain medical expense was necessary.
These categories are the most universal and should cover most of your recordkeeping needs. Everyone's needs are unique, however, and there may be other records that are important to you. Skimming through our Tax Library Index might highlight other categories that apply to you.

What kind of recordkeeping system do I need?

Unless you own or operate your own business, partnership, or S corporation, recordkeeping does not have to be fancy.

Your recordkeeping system can be as casual as storing receipts in a box until the end of the year, then transferring the records, along with a copy of the tax return you file, to an envelope or file folder for longer storage.

To make it easy on yourself, you might want to separate your records and receipts into categories, and file them in labeled envelopes or folders. It's also helpful to keep each year's records separate and clearly labeled.

If you have your own business, or if you're a partner in a partnership or an S corporation shareholder, you might find it valuable to hire a bookkeeper or accountant.

Do you contribute to charity?

If you donate to a charity, you must have receipts to prove your donation.

Starting in 2007, contributions in cash or by check aren't deductible at all unless substantiated by one of the following:

A bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution. Bank records may include: a canceled check, a bank or credit union statement or a credit card statement.
A receipt (or letter or other written communication) from the qualified organization showing the name of the organization, the date of the contribution, and the amount of the contribution.
Payroll deduction records. The payroll records must include a pay stub, Form W-2 or other document furnished by the employer that shows the date and the amount of the contribution, and a pledge card or other document prepared by or for the qualified organization that shows the name of the organization.

Besides deducting your cash and non-cash charitable donations, you can also deduct your mileage to and from charity work. If you deduct mileage for your charitable efforts, keep detailed records of how you figured your deduction.

Are you employed by someone else?
If you work for someone else and spend your own money on company business, keep good records of your business expense receipts. You will need these records to either get a reimbursement from your employer or to prove business-related deductions that you take on your taxes.

Do you have income from tips?
If you make tips from your job, the hand of the IRS reaches here too, and if you are ever audited, the IRS will be interested in records of how much you made in tips.

Do you own property?
If you own property, be particularly careful to keep receipts or some other proof of all your expenses, especially for repairs and improvements.

Do you hire domestic workers?
It's important to keep accurate information about who works for you, including nannies and housekeepers, when and where they worked for you, and how much you paid them for the work.

Do you have a business?
If you have a business, you must keep very careful records of all your business expenses, including vehicle mileage, entertainment expenses, and travel expenses.

If you have a business, just because you have cash in your pocket doesn't mean you're in the black on the books. Keeping up-to-date records of all transactions and costs will not only help you tax wise, it will tell you if your business is actually profitable.

Do you travel for your business?
If you travel for business, keep good receipts and logs of all your travel expenses, including those for meals and entertainment. You will need this information whether you work for yourself or for someone else.

Tax Benefits of Higher Education

What types of tax breaks are available for education costs?

The following is a list of options to consider:

Close the doors.
Sell to an outsider or employee.
Retain ownership but hire outside management.
Retain family ownership and management control.
There are four basic reasons why family firms fail to transfer the business successfully:
Lack of viability of the business.
Lack of planning.
Little desire on the owner's part to transfer the firm.
Reluctance of offspring to join the firm.
The primary cause for failure is the lack of planning. With the right succession plans in place, the business, in most cases, will remain healthy.

What are education tax credits?

A tax credit can be an especially valuable tax break because it reduces the actual tax you owe dollar-for-dollar, providing much more tax savings than a deduction of an equal amount. Two tax credits are available for education costs:

American Opportunity Tax Credit (AOTC). This tax break covers 100% of the first $2,000 of tuition and related expenses and 25% of the next $2,000 of expenses. The maximum AOTC, per student, is $2,500 per year for the first four years of postsecondary education in pursuit of a degree or recognized credential.

Lifetime Learning Credit (LLC). If you’re paying postsecondary education expenses beyond the first four years, check whether you’re eligible for the LLC (up to $2,000 per tax return).

If you file married-filing separately, you cannot claim these credits.

If you pay qualified expenses for a school semester that begins in the first three months of next year, you can use the prepaid amount in figuring your credit for this year.

As future year-end tax planning, this rule gives you a choice of the year to take the credit for academic periods beginning in the first 3 months of the year; pay by December and take the credit this year; pay in January or later and take the credit next year.

Eligible students. You, your spouse, or an eligible dependent (someone for whom you can claim a dependency exemption, including children under age 24 who are full-time students) can be an eligible student for whom the credit can apply. If you claim the student as a dependent, qualifying expenses paid by the student are treated as paid by you, and for your credit purposes are added to expenses you paid. A person claimed as another person's dependent can't claim the credit. The student must be enrolled at an eligible education institution (any accredited public, non-profit or private post-secondary institution eligible to participate in student Department of Education aid programs) for at least one academic period (semester, trimester, etc.) during the year.

Income limits. To claim the AOTC or the LLC, your modified adjusted gross income (MAGI) must not exceed $90,000 ($180,000 for joint filers). The credits begin to phase out when MAGI hits $80,000 ($160,000 for joint filers). MAGI generally is the same as AGI. The "modifications" only come into play if you have income earned abroad.

Choosing the credit. You can't claim both credits for the same person in the same year. But you can claim one credit for one or more family members and the other credit for expenses for one or more others in the same year - for example, an AOTC for your child and an LLC for yourself.

Do any tax planning considerations apply to education tax credits?

For an academic period (quarter, semester, etc.) beginning in the first 3 months of a calendar year, you can pick which year to pay the expense and take the credit. That is, pay in December and take the credit on this year's return when you file in April, or pay in, say, February of next year and take the credit on next year's return the following April.

How does a Coverdell ESA work?

A Coverdell Education Savings Account (ESA) allows tax-advantaged saving for education expenses. Here are the details:

No more than $2,000 a year can be contributed to any beneficiary of an ESA in any year and contributors are subject to income limits. Modified AGI cannot exceed $110,000 ($220,000 joint filers).
Contributions aren't deductible and excess contributions are subject to penalty.
Withdrawals are tax-free to the extent used for qualified education expenses.
Contributions can't be made after the student reaches age 18, and the account generally must distribute all funds remaining in the account when the student reaches age 30.

An ESA may be used for primary and secondary education, including paying for room and board of children in private schools, and for computers and related materials whether or not away from home.

There can be a number of ESAs for any student. Various family members, such as grandparents, aunts, and uncles, and siblings--and persons outside the family--can contribute to separate accounts for a student.

The original student beneficiary for the ESA can be changed to another family member, such as a sibling - for example, if the original beneficiary wins a scholarship or drops out.

Funds can be rolled over tax-free from one family member's ESA to another's, for example, to avoid distribution when the first family member reaches age 30.

What are 529 plans?

These college savings plans have been established by almost every state and some private colleges. You invest now to cover future college or vocational school expenses by contributing to a savings plan or buying tuition credits redeemable in the future. Investments grow tax-deferred, and distributions to pay qualified postsecondary school expenses are tax free. You may choose any state's plan, regardless of where you live. Funds from 529 plans also can be used for up to $10,000 of elementary and secondary school tuition per year and up to $10,000 of student loan debt per beneficiary.

Even if a 529 plan is used to finance a student's education, the student or the student's parents still may be eligible to claim the AOTC or LLC, as long as expenses paid with the 529 plan distribution aren’t used to claim the credit.

How do Coverdell ESAs and 529 Plans differ?

Coverdell ESAs limit annual contributions to $2,000 a year per student; 529 plans allow a much larger contributions. Coverdell ESAs allow a wide choice of investments; 529 plan investment choices are limited. Coverdell ESAs are more flexible when it comes to funding elementary and secondary school expenses.

Can my traditional IRA be used for education?

Yes. The 10% penalty on withdrawal under age 59-1/2 won't apply, but ordinary income tax will apply to at least some of the withdrawal.

Can a Roth IRA be used for education?

Yes, generally under the same terms as traditional IRAs. Also, ordinary income tax is somewhat less likely or may be smaller in amount, than with traditional IRAs.

Can I deduct student loan interest?

Personal interest expense generally isn't deductible, but student loan interest expense is deductible, subject to the following limits:

You must be the person liable on the debt and the loan must be for education only (not an open line of credit).
Your 2025 MAGI can't exceed $200,000 ($195,000 for 2024) if you're a joint filer or $100,000 ($95,000 for 2024) if you're a single filer. The deduction begins to phase out when 2025 MAGI hits $170,000 ($165,000 for 2024) for joint filers and $85,000 ($80,000 for 2024) for single filers. Married couples filing separately cannot take the deduction.
You can't be claimed as a dependent on someone else's tax return.
The maximum deduction is $2,500.

If I take a home equity loan to pay education expenses, can I deduct the interest?

For tax years prior to 2018, you could deduct interest expense on up to $100,000 of home equity loan debt used to pay educational and other non-home-related expenses. This deduction wasn't subject to the AGI limits that apply to the student loan interest expense deduction. However, for tax years 2018 through 2025, taxpayers are no longer able to deduct interest on home equity loans taken out for non-home-related purposes.

What tax treatment applies if my student loan debt is canceled?

Forgiven debt is typically treated as taxable income, but tax-free treatment is available for student loan debt forgiven after Dec. 31, 2020, and before Jan. 1, 2026.

Warning: Some states may tax such forgiven debt.

Even after 2025, forgiven student loan debt might be excluded from taxable income in certain circumstances.

What's the tax relief for education savings bonds?

Interest on redemption of Series EE bonds is tax-exempt if you redeem them in a year you have qualified education expenses. Exemption depends on the amount of your income in the year you redeem the bond.

Must I pay tax on my employer's payment or reimbursement of my education expenses?

Maybe not. Up to $5,250 can be tax-free. Exemption can apply to graduate level courses.

Can I take tax deductions for education I pay for that helps me in my work?

For tax years prior to 2018, the answer was, yes, if it was to maintain or improve skills in your present job, but no, if it was to meet minimum requirements of that job, or to qualify to enter a new business. Furthermore, employees' deductions were subject to the 2% of AGI floor on miscellaneous itemized deductions. However, under the Tax Cuts and Jobs Act, for tax years 2018 through 2025, employee business-related deductions (including education expenses) are disallowed. Self-employed individuals are still able to deduct qualifying educational expenses on Schedule C.