Archive for ‘personal finance’

April 16, 2015

Should the rich pay more taxes?

by Grace

Top 20% of Earners Pay 84% of Income Tax

When people claim that the rich don’t pay their fair share of taxes, do they believe that top earners should pay 90% or more of taxes?

The bottom 40% of earners pay no taxes, and actually pay negative income taxes through government transfer payments.

Why is the share of income taxes negative for 40% of Americans? In recent decades Congress has chosen to funnel important benefits for lower-income earners through the income tax rather than other channels. Some of these benefits, such as the Earned Income Tax Credit and the American Opportunity Credit for education, make cash payments to people who don’t owe income tax.


The top 1% of earners pay “nearly half the income tax”.

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The average tax rate for those earning more than $1 million is 27.4%.

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Professor Mark Perry says we should “thank top 20% for shouldering 84% of the income tax burden”.  So are the top earners villains or heroes?

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Laura Saunders, “Top 20% of Earners Pay 84% of Income Tax”, Wall Street Journal, April 10, 2015.

April 15, 2015

You could lose your tax refund if you have a past-due student loan

by Grace

Say good-bye to your tax refund if you have past-due student loans.

In most cases, creditors are unable to touch tax refunds. Not so with student loans.

While credit card companies and other private debt collectors are barred from garnishing money coming to taxpayers from Uncle Sam, some federal and state creditors can help themselves to tax refunds via a process known as ‘offsetting.’ Under the Treasury Offset Program, these entities get a whack at your tax refund if you have an outstanding debt in certain categories, including:

  • past-due child support payments
  • back taxes
  • any unemployment compensation owed to the state
  • past-due student loans

This is another reason to pay your student loans on time, or better yet, make sure you only take on as much debt as you can afford to pay back.

———

Aron Macarow, “You Can Lose Your Tax Refund if You Have Student Loans”, Attn:, March 21, 2015.

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April 14, 2015

A college financial planning timeline

by Grace

Don’t wait until your child’s senior year of high school to begin planning how to pay for college.  The first 18 years go quickly, and it’s never too soon to begin preparing.

Here’s one simplified approach showing some important steps along the timeline to college, with a focus on the financial planning aspect of the process.

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Before High School

Start saving for college ASAP:  This is the relatively uncomplicated part.  Although we can’t predict the costs of college over a child’s lifetime, it almost always makes sense to begin saving early on.  Even if MOOCs or other innovations make higher education more affordable in the future, there’s usually not much of a risk in saving too much since there are options for dealing with “left-over money in your 529 plan”.

Before Junior Year of High School

  • NMS potential:  If your child tends to score in the 95%ile of standardized tests, he may have a shot at earning a National Merit Scholarship.  A little test prep can make the difference in qualifying for significant merit financial aid.
  • Base Income Year (BIY): If there is a chance your family may qualify for need-based financial aid, you should explore ways to minimize income during the BIY, the 12-month period that begins January 1 during your child’s junior year.  Since the BIY is used as a snapshot for determining financial need, you may want to consider strategies such as not selling stocks or property that will create large capital gains, refrain from converting to a Roth IRA, or defer bonus or other income.

Junior Year of High School

  • Create list of schools:  Get serious and make a realistic list that includes academic and financial safeties.
  • Can we afford it? 1-2-3:  Determine affordability by using the 1-2-3 Method or something similar.

Senior Year of High School

Senior year is the busiest time for families as they handle the many details of the college application process, including final determination of how they will be paying.  Some important acronyms:

The two main forms used in determining financial aid eligibility are the FAFSA and PROFILE.
FAFSA is the acronym for Free Application for Federal Financial Aid. It is a form submitted to the government that collects the financial information needed to decide your eligibility for federal FA. It’s also used by many colleges to determine institutional aid.
PROFILE is a financial aid application service offered by the College Board, used by about 400 colleges to learn if students qualify for non-federal student aid. There is a fee to submit a PROFILE, whereby the FAFSA is free.

The SAR (Student Aid Report) is a summary of your FAFSA responses and provides “some basic information about your eligibility for federal student aid”.


It’s important to get started.

While this outline only hits the highlights along the road to paying for college, it can be used as a springboard for further research and action.  It makes sense to start with an outline, and then fill in the details as you go along.

March 6, 2015

Most booster clubs don’t qualify for tax-deductible contributions

by Grace

Most school booster clubs are not compliant with IRS regulations, potentially affecting parents and other donors who deduct contributions on their tax returns.

There are an estimated 100,000+ school, sports, band, and other booster clubs currently in existence in the United States …. Surprisingly, however, estimates indicate that less than 10% of these clubs are compliant with Internal Revenue Service Code regulations. Along with failure to register with the IRS, violation of the “inurement” prohibition under IRS Code Section 501(c)(3) is one of the most prevalent issues presently challenging local booster clubs.

This problem came to light at a local high school, where concerned parents hired a private investigator to look into their athletic booster club.

Run by parents and athletic officials in the Mount Pleasant school district, the booster club has been soliciting tax-deductible contributions for years after it was stripped of its federal tax-exempt status. In fact, the club has not filed an annual financial report with the IRS since 2009.

Contributors may face trouble with the IRS.

“I thought I was giving money to a tax-deductible charity,” said parent Mike Nicosia. “I was claiming it on my taxes. Everybody who did that, I would assume, now has to worry about an audit or a liability as far as interest and penalties.”

Even if the clubs don’t explicitly promote themselves as 501(c)3 nonprofits, many donors make that assumption.

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Jorge Fitz-Gibbon, “Westlake boosters under fire over tax-exempt status”, lohud.com, March 1, 2015.

February 10, 2015

Better math skills lead to better personal financial behavior

by Grace

A new study suggests that children need to learn more math, not finance, to be better with money.

The way our schools teach students about personal financial planning may be misguided.

For decades, studies have extolled the benefits of financial education, pointing out that students who take finance classes score well on tests of financial knowledge—and higher financial literacy leads to better financial behavior.

Conclusions like these have led to a growing consensus that schools should teach children about managing their finances, with 43 states now mandating some kind of training.

Shawn Cole found this troubling. Not because the studies aren’t true: Many, he says, do show a correlation between financial education and good financial behavior. But few studies demonstrated a strong causal link.

Mandated financial education did not lead to improved personal financial outcomes.

So, the professor of finance at Harvard Business School wondered, if widespread financial education were really effective, why are so many young people struggling with debt, foreclosure and low asset accumulation? He and a group of researchers set out to find an answer. They looked at the states that mandated personal-finance curriculums in high school, and compared the financial health of students who graduated before the mandates to those who graduated after. Their hypothesis: If personal-finance education worked, the students who graduated after the programs were implemented would be better off financially.

They weren’t. After controlling for state, age, race, time and sex, and analyzing a huge pool of historical financial data, the group found that there was no statistically significant difference between people who graduated within a 15-year span either before or after the personal-finance programs were implemented. Graduates’ asset accumulation and credit management were the same, with or without mandated financial education.

But better math skills lead to better personal financial outcomes.

But the study, issued last year and currently under revision for publication, did find one school subject that does have an impact on students’ financial outcomes: math. Students required by states to take additional math courses practiced better credit management than other students, had a greater percentage of investment income as part of their total income, reported $3,000 higher home equity and were better able to avoid both home foreclosure and credit-card delinquency.

Well, this seems obvious.

“A lot of decisions in finance are just easier if you’re more comfortable with numbers and making numeric comparisons,” says Mr. Cole.

The lesson here is to focus more on better math instruction.

A new magazine from Jean Chatzky wants to teach children financial lessons.

Last month, Ms. Chatzky and Time for Kids, a division of Time Inc., introduced a magazine intended to teach financial literacy to fourth, fifth and sixth graders. The PwC Charitable Foundation, which was started by the giant financial consulting firm PwC, is backing the publication.

“Kids are very interested in money,” Ms. Chatzky said. “What we’re trying to get across to them is money is a tool that they need to know how to manage to succeed in life.”

… Each four-page issue will cover an aspect of finance, like budgeting, investing and taxes.

Perhaps this new magazine should include a section on math instruction.

Related:  ‘math skills are correlated to higher earnings’

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Charlie Wells, “The Smart Way to Teach Children About Money”, Wall Street Journal, February 2, 2015.

Sydney Emberfeb, “New Magazine Teaches Children Financial Lessons”, New York Times, February 1, 2015.

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December 24, 2014

The ‘deadweight loss of Christmas’

by Grace

If you’re still trying to find last-minute Christmas gifts, maybe you should relax and consider that there is a sound economic reason to give cash.  Gift-giving creates what economist Joel Waldfogel called the “deadweight loss of Christmas”, which is the monetary loss that arises from people making bad gift choices for other people.

In a 1993 American Economic Review article “The Deadweight Loss of Christmas,” Yale economist Joel Waldfogel concluded that holiday gift-giving destroys a significant portion of the retail value of the gifts given. Reason? The best outcome that gift-givers can achieve is to duplicate the choices that the gift-recipient would have made on his or her own with the cash-equivalent of the gift. In reality, it’s highly certain that many gifts given will not perfectly match the recipient’s own preferences. In those cases, the recipient will be worse off with the sub-optimal gift selected by the gift-giver than if the recipient was given cash and allowed to choose his or her own gift. Because many Christmas gifts are mismatched with the preferences of the recipients, Waldfogel concludes that holiday gift-giving generates a significant economic “deadweight loss” of between one-tenth and one-third of the retail value of the gifts purchased.

Gift cards may be cutting into the deadweight loss.

The real drag on the economy then isn’t gifts; it’s bad gifts. And Mr. Waldfogel cheers the rise of the gift card as a substitute for the bad gift: Something you can buy your niece or grandson when you have no idea what they actually like.

“What’s interesting about gift cards is that they are a lot like cash but have emerged as a way to give the choice to the recipient without the ickiness of cash,” he says. In other words, the deadweight loss problem he identified in 1993 may be on the wane because of a technological advance.

On the other hand, it is estimated that between 10 to 30 percent of gift cards are never used.

What’s not mentioned is the pleasure experienced from giving and receiving presents.  It’s hard to put a price on that, and we should remember that it’s the thought that counts!

———

Mark J. Perry, “Holiday shopping? Consider the most economically efficient gift of all: cash, and avoid the deadweight loss of Christmas”, Carpe Diem, December 17, 2014.

Josh Barro, “An Economist Goes Christmas Shopping”, New York Times, December 19, 2014.
DEC. 19, 2014.

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December 17, 2014

Gifts for college students

by Grace

Do you have a college student on your gift list?

Here’s a list of “20 great holiday gifts for college students”.

This idea caught my attention.

Airplants. These super-cute, trendy plants survive on air — do not plant them in soil — and can be perched anywhere to decorate a dorm room. (Many are under $10).

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Holiday Gift Guide: 25 Under $25 for College Students and Young Adults

An electric kettle that boils water in a few minutes for tea or hot chocolate would probably be welcomed by almost any student.

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Another idea is to give the gift of experience.  Maybe something like tickets to a concert or cooking lessons would appeal to your college student.

However, for the recipients in my life, I consider cash to be the best holiday gift for young adults.

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Lynn O’Shaughnessy, “20 great holiday gifts for college students”, CBS Moneywatch, November 24, 2014.

“Holiday Gift Guide: 25 Under $25 for College Students and Young Adults”, Grown & Flown, December 13, 2014.

November 11, 2014

What is Work-Study?

by Grace

Federal Work-Study is a program that provides part-time jobs for undergraduate and graduate college students with financial need, allowing them to earn money to help pay education expenses.

How does it work?

You apply for work-study just like you do all other forms of financial aid: by filling out and submitting the Free Application for Federal Student Aid (FAFSA). Your financial need usually determines the amount of work-study you are eligible for.

You find work-study jobs through job banks or postings by the financial aid or college employment offices. In most cases, students will have the opportunity to interview with potential work-study employers. The interviews help students and employers find out if the job is a good fit. Sometimes the college arranges these interviews; sometimes the student does. Even if you are eligible for work-study, there is no guarantee you’ll get a work-study job. In the end, whether or not you are hired is up to the employer.

What kinds of jobs are available?

If you get a work-study job on campus, the college will usually be your employer. Typical jobs include working in the library or bookstore, serving other students in the dining hall, and assisting with college events. Off-campus work usually benefits the public in some way and should relate as closely as possible to your course of study.

How can work be considered financial aid?

Sometimes it’s difficult to see how working part-time during college could be considered “financial aid.” Keep in mind that the money you make from a work-study job does not need to be repaid, nor does it count against you when you apply for aid the following year. Plus, the smooth hiring process, flexible hours, choice and availability of jobs, and preset salaries of a typical work-study program usually make finding a work-study job easier than finding work on your own.

Work-Study can be an important benefit, with advantages over other types of jobs. Contact colleges to obtain details about their programs.  The federal student aid site is a good source of information:

Federal Work-Study jobs help students earn money to pay for college or career school.

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“How Work-Study Works”, College Data.

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August 6, 2014

Gloomy outlook on recovery from loss of net worth suffered during Great Recession 

by Grace

Median net worth declined by 36%  and wealth inequality substantially increased over the ten years ending in 2013.  The Great Recession of 2007 and the slow subsequent recovery can be blamed for much of this economic pain.

The inflation-adjusted net worth for the typical household was $87,992 in 2003. Ten years later, it was only $56,335, or a 36 percent decline, according to a study financed by the Russell Sage Foundation. Those are the figures for a household at the median point in the wealth distribution — the level at which there are an equal number of households whose worth is higher and lower. But during the same period, the net worth of wealthy households increased substantially.

 

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These numbers come from a study, “Wealth Levels, Wealth Inequality, and the Great Recession”, released by the Russell Sage Foundation.  According to the authors, the outlook for the “coming years” does not look much brighter for prosperity among the overall population.

Through at least 2013, there are very few signs of significant recovery from the losses in wealth experienced by American families during the great recession. Declines in net worth from 2007 to 2009 one large, and the declines continued through 2013. These wealth losses, however, were not distributed equally. While large absolute amounts of wealth were destroyed at the top of the wealth distribution, households at the bottom of the wealth distribution lost the largest share of their total well. As a result, wealth inequality increased significantly from 2003 through 2013; by some metrics inequality roughly doubled.

The American economy has experienced rising income and wealth inequality for several decades, and there is little evidence that these trends are likely to reverse in the near-term. It is possible that the very slow recovery from the great recession will continue to generate increased wealth inequality in the coming years as those hardest hit may still be drawing down the few assets they have left to cover current consumption and the housing market continues to grow at a modest pace.

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Anna Bernasekjuly, “The Typical Household, Now Worth a Third Less”, New York Times, July 26, 2014.

Fabian T. Pfeffer, Sheldon Danziger, and Robert F. Schoeni, “Wealth Levels, Wealth Inequality, and the Great Recession”, Russell Sage Foundation, June 23, 2014.

July 30, 2014

Sometimes individual bonds are less risky than bond funds

by Grace

Although usually considered safer than stocks, bonds carry their own risks.  In particular, bond funds present specific risks not found in individual bond investments.

Bonds have long been viewed as a port in the storm, a low-risk asset class that creates consistent cash flow and helps to balance equity market mood swings.

But Shelly Schwartz of CNBC wrote about the “top six ways the most benign securities in your asset mix can potentially pack a punch”.

1. Interest-rate risk …
2. Bond fund risk …
3. Credit risk …
4. Liquidity risk …
5. Inflation risk …
6. Reinvestment risk …

Each item is detailed in the CNBC article.  I have a particular aversion to bond fund risk, and strongly prefer individual bonds or Unit Investment Trusts over bond funds in my own portfolio.  I invest in bonds for longer-term stability and consistent yield, two features often missing in bond funds.

Bond fund risk

Unbeknownst to many, bond funds also expose investors to a unique set of risks in a rising rate environment that individual bonds do not. Why?

Individual bonds, like Treasuries, municipals and corporate bonds, are sold with a finite maturity: the date on which you, the investor, get your principal back—if the debt issuer doesn’t default—and the interest payments you’ve been receiving stop.

Interest-rate fluctuations don’t affect investors who hold individual bonds to maturity.

Fixed-income securities held within a bond fund, however, are designed to mature on a staggered basis, creating a perpetual income stream for investors. The fund manager replaces bonds as they mature, when the issuer’s credit is downgraded and when the issuer “calls,” or pays off the bond before the maturity date.

When bond prices fall as interest rates rise, the net asset value (NAV) and return of a bond fund also decline, said Greg Ghodsi, senior vice president of investments at Raymond James.

A $300,000 investment in a fixed-income mutual fund with an average maturity of 20 years (a mix of 10-, 20- and 30-year bonds), for example, would be worth $260,000 if interest rates climb just 1 percent. (Shorter-term bond funds would be less volatile.)

But the pain doesn’t end there. The drop in value makes investors nervous, which prompts more selling. That forces the fund manager to unload some of their holdings to meet redemptions, said Ghodsi.

Depending on how significant the redemptions are, he noted, they may have to sell their highest-yielding bonds and replace them with those offering a lower yield, or assume more risk to obtain the same return, which can drive prices quickly lower.

The investors who didn’t bail get stuck with an investment that may not match their risk profile or income needs—one that is suddenly a lot less liquid on the secondary market. Ouch.

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Shelly Schwartz, “6 ways bonds can bite you”, CNBC, July 14, 2014.

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