This postcard isn't from a friend

Q. I received a postcard in the mail that states that I have an annuity  "that has reached the end of its surrender period" and to please them to discuss my options. When I called, I was told no one would talk to me by phone, only an appointment for a person coming to my home would be made. I am a little fearful of a home visit since I am retired and live alone. Do you know anything about this type of company?

A. Do not invite a sales person from this company to your home. Most likely the company had no idea whether you really had an annuity coming due. It got your name from some mailing list and sent you a card hoping you would respond. Obviously it worked. Their goal is to sell you an annuity, most likely one with a high commission for them and a long surrender penalty period for you. Don't do it. I discussed this type of solicitation in one of my columns.

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Why has my assessment gone up when housing is in a slump?

Q. I have been notified of an increase in my property tax assessment. How can anyone justify the amount of increases pending, when the housing marking has taken a major downturn? I cannot find a rational explanation.

A. Assessments are based on the past--actual sales for comparable properties--not on speculation about the future. It will take a lot of
properties selling at lower prices (which has not happened) to bring
down assessments.

Oh, my aching teeth!

Q. My wife needs to have dental surgery that will cost approximately $40,000.  Our insurance will not cover the cost and the only way we can pay for it is to take the money out of a 401(k). I know we will have to pay regular income tax, but will we also have to pay the 10 percent additional penalty?

A. Sadly, yes, if you are younger than 59 1/2. If you are still working for the company, you'll need to find out what the plan rules are for hardship withdrawals and loans. You might consider taking all or part of the money as a loan rather than as a withdrawal. A home equity loan would be another alternative if you have the means to make the payments.

I also highly recommend getting a second opinion before proceeding with any surgery.

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How much is in your 401(k)?

Saving consistently pays off. For workers who had 401(k) accounts throughout the six years ending in December, the average account grew 50 percent and had an ending balance of $102,014. As you might expect, there were some big differences by age:

20s: $24,169   / 30s: $50,90  / 40s: $91,848  / 50s: $127,766 / 60s: $140,957

The Employee Benefit Research Institute says the results show the merits of continuing to contribute even when stocks are in a funk.  About two thirds of plan assets are invested in stocks, although 15 percent had no stock exposure at all. Shockingly, that included 19 percent of the 20-somethings.

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How can I keep a duplex and buy a new home?

Q. I purchased a duplex from my father-in- law 2 years ago. I have been living in one side and renting the other since taking ownership and my father-in-law holds the
18-year-mortgage. I would like to keep this property and move out to rent it completely and buy a new home. I do not have any money to put down on a new home. My questions are what are my options as far as home equity, extending my mortgage and the possible taxes that I would incur and/or pitfalls?

A. In my opinion, your best bet is to raise the money for a 20 percent downpayment on your new home plus some extra cash as an emergency cushion by borrowing money against your duplex either as a total refinancing (paying off your father-in-law) or as a second mortgage. Once you know the cost of those options and the size of your future payments, consider whether it is reasonable to assume you'll be able to keep both sides of the duplex rented at a high enough rate to cover your mortgage(s), insurance, taxes and repairs. If not, I doubt that you can afford to own both a duplex and another home.

If the plan above proves financially feasible, then having a rental property could work out well for you. However, keep in mind that by moving out, you will be giving up two big tax breaks on the property. Since you have owned and lived in the property for at least two of the last five years, the capital gain on the part you've lived in would be tax free, assuming it's less than $500,000. The gain on the part that's rented is taxable. You could even convert the entire property to your residence and make the entire gain tax-free, except for recovery depreciation deductions. Also, by moving out, you lose the Save Our Homes cap on real estate taxes for the part that you live in.

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What's with this Social Security tax?

  Q. I am 72 and I keep hearing that you don't have to pay any taxes on your Social Security any more after 70 no matter how much you make for the year. With my wife working, my Social Security and IRA distributions, our income averages over $50,000 and I get 85 percent of my Social Security taxed when I file. This is not fair.

A. You're confusing two issues. Once you reach your normal retirement age*, Social Security BENEFITS will not be reduced because of income from work.For example, if you were 63, you would lose $1 in benefits for every $2 you earned above $12,480. But at your age, you can work as much as you want with no reduction in benefits. This rule has nothing to do with taxes on your benefits. (*Note: normal retirement age is 65 to 67, depending on when you were born.)

Sadly, there are lots of things about taxes that are not fair. I don't like paying income tax on my Social Security tax, but that's how the system works.

Can I deduct a gift to my daughters?

Q. This year I bought each of my daughters an  automobile worth a little over $16,000. I am paying payments on them, but will not have them fully paid for before the end of 2006. My question is, can I count this a a gift to my children and deduct it from my taxable income? 

A. How lovely it would be if the IRS would subsidize gifts to our children. Unfortunately, gifts to individuals are never deductible, only those to IRS-recognized charities. In fact, quite the contrary. If you give away more than $12,000 to any one person in any one year, the IRS expects you to file a gift tax return (Form 709). If you are married, you and your spouse can elect to split the gift, which means it can be up to $24,000 before affecting your gift tax liability. However, you won't actually owe gift taxes. Amounts over $12,000 a year reduce your lifetime gift allowance of $1-million and your estate tax exclusion of $2-million. If the cars are titled in your daughters' names and the loan is in your name, then the gift is the full purchase price of the car. If the loan is in their name and you are giving them the money for the payments, future payments don't count as gifts until you've actually given them. It sounds as if your daughters have a very generous parent!

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Am I really costing my husband thousands in taxes?

Q. I work as a preschool teacher part-time.  My husband claims I am costing him thousands in taxes every year because he can't claim me as a dependent. Is this true?  If so, how much am I really "costing" him?

A. Only your accountant knows for sure. Most likely you file jointly since you are married. That means there is one exemption for each of you on the tax return. This is true whether or not you work. From there the situation gets more complicated. The extra income you earn might be causing your family's income to exceed the threshholds for claiming those exemptions as well as certain deductions and credits. For example, on 2005 tax returns for a couple filing jointly, filers lost part of their personal exemptions when adjusted gross income exceeded $218,950 and all of them when it exceeded $341,450. If your family income is in that range, this may be what your husband is referring to. Also, the higher the family income, the higher the rate at which each additional dollar of income is taxed. While your income may be pushing the family over some tax threshholds, his income is also causing your income to be taxed at a higher rate. Unfortunately, if you changed to "married, filing separately" status, your combined tax liability probably would be higher than it is now.

After all these tax issues are considered, it is highly likely that your income is a net plus for your family. 

(Photo credit: Times archives)

   

Now you can donate your IRA to charity

Here's some good news for IRA owners who are over 70 1/2 and who don't need those annual minimum distributions they are required to take. Now you can donate the money to charity and avoid paying taxes. This special provision is in effect only for the 2006 and 2007 tax years, although Congress could decide to extend it or make it permanent. IRA custodians will have to work out the mechanics since the money must come directly from the IRA. (IRA checkbooks, anyone?)

You can read my column this Sunday for more details. Or if you have questions now, post a comment here.

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Should I dump my mutual fund?

Q. I have Vaguard index European fund with a ytd return of 15.7% and Vanguard Growth index with a return of -1.2%.  Would I be wise to close the Growth fund and put it all in European? 

A. It might or might not turn out to be more lucrative, but it would not be wise. That's because it would violate two important tenets in my vision of investing wisdom. First, wise investors diversify. They invest in both stocks and bonds and in both the U.S. and foreign countries. International diversification involves more than just Europe. It's OK to have more money in one area than in another, but not OK to exclude the rest of the world entirely. Second, wise investors do not switch investments based on short periods of performance, nor do they compare apples to oranges. Your US fund should be judged against the Standard & Poor's 500 Index, not against a foreign fund. If it has underperformed for two or three years, you should trade it in for a better-performing U.S. fund, not a foreign fund.

Can I claim my son as a dependent?

Q. Can I claim my son as a dependent on my tax return? I pay over 50 percent of his support, but he lives with my ex. Our divorce decree does not state who can claim him. She has been getting all the deductions. I only want the dependent credit. What will happen if I take that credit this year?

A.  Unless the divorce decree specifies otherwise, the general rule is that the custodial parent gets to claim the child as a dependent. If you claim him, your claim will be rejected if your ex-wife filed before you did. If you file first, you'll get to claim him and her claim will be rejected. However, if she complains to the IRS, you can expect the IRS to side with her.

Where can I learn more about new pension & saving rules?

Q. I just read your 8/13 article referencing a congressional law.  My question is whether this law is on the books and active? Would you have the exact name or number for the law?

A. The Pension Protection Act of 2006 (H.R. 4) has been approved by Congress and President Bush is expected to sign it this week. Some provisions take effect immediately, while others have various effective dates.

You can read a good summary of this bill here. Click on the "tax briefing."

I'm on MySpace Now

I've joined MySpace.com after reading an article in The Times about businesses using this popular networking site. My goal is to generate more interest in this money blog and help more people find answers to their money questions.

If you're also a MySpace user, you are invited to become my online friend. You can find my site here.

University of Florida alumni can also find me online at the Gator Nation Network.

Can I get more than $100,000 in insurance on my bank account?

Q. Can you have insurance on $100,000 in deposits at different banks?

A. Indeed you can. In fact you can have insurance on more than $100,000 in one bank. The key is how you set up the accounts. Your IRA accounts at one bank can be insured for up to $250,000. "Payable on death" and trust accounts can be insured for up to $100,000 for each beneficiary. These limits are all per bank, so when you open accounts at a second bank, you start fresh. The FDIC publication, Your Insured Deposit, offers examples of how to structure accounts.

What are savings bonds paying these days?

Q. Can you tell me what % is being paid for new EE bonds?  Also, the I bonds.

A. New EE bonds pay a fixed rate of 3.7%, while new I bonds pay a an adjustable rate that's currently 2.4%. Rates change every six months; the next adjustment will be Nov. 1. In the future you can go right to the source for information about savings bonds and other government securities.

How do I value my home for insurance?

Q. Where can I get a general estimate for construction costs per square foot?  Years ago, when we built our existing house, contractors had a standard rate they used for our area.  Is this still in existence?  I need an estimated idea of the worth of our house for insurance coverage.

A. I can't give you a general estimate, but I can point you to a tool for valuing your house for insurance. This Web site uses standards accepted by the insurance industry for estimating the replacement cost of your home.

A lot of the recent increase in housing prices is land cost rather than building cost. You don't want to insure the value of the land.

Is an 80-20 mortgage a good idea?

Q. My son is shopping for a mortgage. Several lenders are offering 80-20 mortgages, which I have never heard of. Is this a good idea? He is not a first-time buyer. It would be the second home for him and his wife.

A. An 80-20 mortgage is a package of two mortgages, designed for people who do not have adequate cash for a down payment. The first 80 percent is pretty much a standard first mortgage. The other 20 percent is a second mortgage or equity credit line at a higher interest rate that essentially functions as the down payment. At least in theory, this route is cheaper than taking out a low down payment mortgage and being required to purchase mortgage insurance. Here is a Bankrate.com article discussing these mortgages at length.

If your son and his wife already a one home, perhaps selling it will leave them with enough money to put 20 percent down on the new house. In that case, they would not need an 80-20 mortgage.

Saving for retirement with mutual funds

Mutual funds are the best retirement savings vehicle for most workers, but deciding which ones to use can be challenging. Some people like analyzing fund information, but lots of us would rather keep things simple. I found some good suggestions for doing that in Kiplinger's Retirement Planning: Your Guide to Securing Your Dreams.

First, the magazine suggests the all-index Vanguard stock portfolio:
30% Vanguard 500 Index (VFINX)
25% Vanguard Small Cap (NAESX)
20% Vanguard Total International (VGTSX)
15% Vanguard Growth (VIGRX)
10% Vanguard Emerging Market (VEIEX)
I'll admit that it caught my attention because the first three funds are ones I happen to have in my Times 401(k) account. The magazine recommends this assortment of funds as a fairly aggressive long-term investment for workers in their 20s or 30s. I think it also could work as the stock portion of an older worker's portfolio, balanced out with fixed-income investments.

Another approach, which is even simpler, is to go with a target-date fund. You pick your fund company (American Century, Fidelity, T. Rowe Price and Vanguard are among the companies that offer them), then pick the fund with a target date closest to your own retirement. As time goes by, the fund managers automatically adjust the stock-bond percentages to become more conservative.

Either approach could get you on track for the future.

What's your advice for the soon-to-be wed?

My husband and I celebrated our wedding anniversary this week, so I've got marriage on my mind.

My column last Sunday featured an engaged couple who sat down with a financial planner months before tying the knot. They went over their debts and assets and came up with plans for handling them both. I think the idea of meeting with a financial planner before marriage is a great one. Very young couples could use the advice to get started on the right path. Older ones need to discuss their debts and assets, both for full disclosure and to get them thinking about financial goals for their lives together.

At a wedding I attended recently, the priest advised the couple - smack in the middle of the elaborate and costly ceremony - to cut up their credit cards. What financial advice do you have for couples who are about to tie the knot?

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