Dump the mortgage deduction to revive U.S. housing

August 25, 2010

Some sacred cows need to be sacrificed in order for a country to prosper again. Let’s start with the deduction for mortgage interest on U.S. tax forms.

Five little-known ways of financing college

August 25, 2010

FINANCIAL/GRADUATESI can hear the quaver in the voice of my neighbors as they send their children off to college this week. Not only do I sense the emotion of having a child leave home, but the anxiety of what it’s going to cost.

Municipal bonds still attractive despite ugly state finances

August 18, 2010
Are municipal bonds the next domino to fall in the still-bruised U.S. financial landscape? While some municipalities and states are definitely fiscal basket cases – California and my home state of Illinois come to mind – “munis” still are generally a safe and yield-friendly way to invest. The most attractive quality of munis now is that defaults are rare, and yields are robust relative to U.S. Treasury bonds. The average tax-free rate for a municipal bond is 4.21 percent, according to the Leuthold Group. Since municipal income is not taxable, the biggest benefits flow to higher-income investors. For a taxpayer in the 35-percent bracket, that 4.21 percent translates to a 6.5 percent tax-equivalent yield. Considering that 10-year Treasuries are yielding less than 3 percent, munis are definitely appealing. Most short-term savings accounts are returning less than 1 percent. Still, there’s the growing problem of public fiscal meltdowns. There are huge pension liabilities looming, and states are cutting jobs left and right. The State of Illinois owes hundreds of millions to school districts and colleges. The economic tide is out in California in a big way. Despite the raft of bad news, bankruptcies of public agencies are rare. There has been an average of eight municipal bankruptcies per year from 1934 through 2009. The five-year default rate for investment grade municipal debt is 0.03 percent, compared to about 1 percent for corporate paper, Leuthold reports. The odds that a state, city or county will go bust is rare. After all, they can always hike taxes, cut jobs and services or restructure debt. From 1970 to 2009, only 54 issuers defaulted, mostly in the housing and health care sectors, according to Moody’s Investors Services. The best way to avoid problems is to protect yourself before you buy a bond or mutual fund. Individual bonds are rated by the major ratings agencies Moody’s, Standard & Poor’s and Fitch. Their letter system is fairly simple: triple-A is the top grade for S&P, Fitch and Moody’s. When you head down the ladder, it’s like looking at term paper grades. A-rated debt is still “high quality,” while B-rated bonds mark the bottom of the investment grades. Generally, the lower the grade, the higher the risk of default. You take the biggest risks by holding single bonds, so it makes sense to diversify through a larger portfolio or bond mutual fund or exchange-traded fund. Fund managers are constantly sorting through bonds and doing research to avoid problems. You can also buy funds that are tailored to the state you live in to avoid paying state income tax. Some relatively low-risk candidates include the Vanguard Limited-Term Tax-exempt fund (VMLTX) and the iShares S&P National Municipal Bond exchange-traded fund (MUB). Both feature low expenses and a wide selection of bonds from across the country. When buying a bond fund, low expense ratios will boost your total return. This is what managers charge on an annual basis for their services. The Vanguard fund, for example, has a 0.2 percent ratio, which is below average for similar funds. If you’re going to buy individual bonds, ask your broker/advisor to perform due diligence to carefully vet the financial condition of the issuer. If they don’t – and you get stuck with a bum bond – it can be a perilous situation.

Are municipal bonds the next domino to fall in the still-bruised U.S. financial landscape?

How to beat China at its own game

August 12, 2010


American politicians campaigning now would do well to stop polarizing the climate change debate and start talking about jobs, economic development and beating China at its own game.

How to avoid credit card fees

August 11, 2010
8/10 Reuters column Avoid Getting Nailed By Credit Card Fees New Fed Rules Offer Some Protection By John F. Wasik Gearing up for those back-to-school, pre-Labor Day sales? The first thing you need in hand isn’t a shopping list, it’s a sound personal credit policy. If you plan how to use credit before you hit the stores, you’ll save yourself a lot of money when the bills come due. Should you pay your bills in full every month, you’ll not only avoid finance charges, your credit will effectively be free for that month net of membership and other fees. What if you don’t pay the balance in full? Don’t allow banks to “pad” your bills with late fees. New Federal Reserve Rules (http://www.federalreserve.gov/creditcard/) that go into effect August 22 give you some protection, but you still need to be vigilant. The Fed’s new rules cap some of the more obnoxious credit-card fees. Here’s how they work: • Credit card issuers can’t charge a penalty of more than $25 for late payers or violating the account’s terms. • You can’t be charged a late fee that exceeds the dollar amount associated with the violation. Card issuers, for example, can no longer charge a $39 fee when a consumer is late making a $20 minimum payment. Instead, the fee cannot exceed $20. • Not using the card? The new rules ban “inactivity” fees. • Banks can’t layer on the fees. Multiple penalty fees based on a single late payment or other violation are illegal. If you think that the Fed is eliminating all late fees, you’re wrong. The Fed makes an exception to all of the penalties if you have “engaged in repeated violations or the issuer can show that a higher fee represents a reasonable proportion of the costs it incurs as a result of violations.” Translated from bankerese, if you’re a serial abuser of your credit limits and payment deadlines, you don’t get a break. Banks will still nail you with late fees. Even if you get hit with a surcharge, you may not have to pay it. Whenever the mail is slow and my statement is a tad late, I call my credit card company and tell them to remove the fees. Since they know that I’ve been a prompt-paying customer for 17 years, they don’t charge me. Credit-card issuers know good customers can switch in a heartbeat — and will. The new Fed rules stem from a federal credit card law that passed in May of last year. Also included in the legislation are warnings that if your credit terms are changing, you will receive a 45-day written notice before they do. What neither Congress nor the Fed decided to curb was the finance charges themselves. Banks are still free to raise them as high as they like. Washington also left alone the troubling problem of debt settlement companies. You’ve probably seen their ads on cable TV. They offer to consolidate and settle your debts for less than what is owed. Debt settlement fees can be exorbitant — ranging from 14% to 18% of total debt. That’s outrageous since the average actively managed stock mutual fund will only charge you about 1% annually to manage your money. For debts ranging from $20,000 to $30,000, reports the Consumer Federation of America (http://www.consumerfed.org/elements/www.consumerfed.org/file/consumerdebttips-english%201_4_10.pdf), these debt settlement firms may charge you from $2,800 to $5,400. That’s in addition to what you owe to your creditors. Are debt settlement firms worth it? A recent Government Accountability Office survey (http://www.gao.gov/new.items/d10593t.pdf) found their claims of success to be “suspiciously high.” It’s unrealistic to believe that a third-party can eliminate all of your debts. Many creditors will take you to court to get their money. Several pieces of legislation are being considered in Congress to police debt-settlement abuses. In the interim, the best way to avoid these firms is to ensure that you don’t get swept away by the coming sales. You’ll save nothing if you pay more to your credit card company than what you saved at the cash register. John F. Wasik is author of “The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream (www.culdesacsyndrome.com).” johnwasik@gmail.comup for those back-to-school, pre-Labor Day sales? The first thing you need in hand isn’t a shopping list, it’s a sound personal credit policy.Gearing up for those back-to-school, pre-Labor Day sales? If you plan how to use credit before you hit the stores, you’ll save yourself a lot of money when the bills come due.

John F. Wasik is a Reuters columnist and author of The Audacity of Help. The opinions expressed are his own.

How to plan for a higher estate tax

August 4, 2010
John F. Wasik is a Reuters columnist, speaker and author of  The Audacity of Help (www.audacityofhelp.net) and 12 other books. The opinions expressed are his own. The estate tax is in limbo this year, so if you are looking at a significant inheritance, death may pay some dividends. As a vestige of the 2001 tax act, the so-called “death” tax disappeared this year, although convoluted rules on valuing estate assets often resulted in higher income taxes. With other issues such as the global financial meltdown, a recession, health care and financial reform dogging it, Congress didn’t get around to fixing the estate levy. Don’t get any ideas. Death and taxes will still have a sting – eventually. Congress will likely do something about the tax before the end of the year – probably after the November election – so don’t count on a free ride. You’ll still need to do some cautionary estate planning. While no one knows what Congress will do, it’s a fairly sure bet the tax will return in some form next year. Record budget deficits mean Congress will be looking for revenue sources. Unless Washington acts, the tax will jump back to the old, pre-Bush-era 55% rate, with a $1 million exemption in 2011. That’s quite a hike considering that last year, when the tax was still in effect, you could get a $3.5 million break per person at a top rate of 45%. There’s little question that the estate tax and related rules are extremely complicated. An overhaul would require a comprehensive look at the myriad trusts and other vehicles used to reduce tax liability. One of the biggest unanswered questions is whether the new tax – and I predict one is coming – will be retroactive. If we’re still mired in a downturn, I don’t foresee any Draconian tax changes. Congress usually opts for “grandfathering” (extending) a tax break into the past rather than imposing a huge, new tax. In the interim, prepare for the coming estate-tax changes with some basic planning. Don’t wait for Congress to make up its mind. • Talk to an estate planning attorney and fee-only financial planner. Do you have a basic estate plan or living will that tells loved ones what to do if you’re seriously impaired? Do you have directions as to what to do with assets upon your demise? • A living trust may be a better vehicle if you have a sizable estate, but they are complicated and need to be planned carefully. Beware of “trust farms” that try to rush you into boilerplate vehicles. It took my wife and I one year to design our trust. • Have you looked at life insurance planning with your adviser? Remember, life insurance proceeds are still tax-free to beneficiaries, and it’s unlikely they will be taxed any time soon. • Did you want to set aside money for charities? Have you considered charitable remainder trusts for this purpose? Donations can be gifted in any number of ways to reduce future tax liability. • If you need to fund college savings vehicles, you can contribute to 529 plans to reduce the size of your estate. One proposal that passed the House would have made last year’s estate tax levels permanent, although it failed to pass the Senate. When it takes up the issue again, it’s possible that Congress will tier the tax depending on the size of the estate. For example, an estate valued at less than $5 million may be subject to a 45% tax with 5-percentage point tax increases for each $5 million in estate value capped at a maximum 55% rate. There’s also a pressing question as to what kinds of exemptions Congress will allow before the tax kicks in. One House proposal called for $2 million to pass from one spouse to another, meaning that $4 million per couple may be exempt. Whatever you do, don’t wait until the end of the year. Talk to your trusted advisers now. Like the false demise of a certain American writer, rumors of the death of the estate tax are greatly exaggerated.

John F. Wasik is a Reuters columnist and author of The Audacity of Help. The opinions expressed are his own.