Advanced Personal Finance

(Note: This is NOT a paid post)

Capital One has rolled out a new service to try to get you to use their rewards credit card above all your others. It’s called Card Lab and it allows you to customize the credit card rewards to your specifications. After checking it out (though I didn’t apply for a card), I found the Card Lab to be a really cool idea, well executed.

Power to the people

I read about how credit card companies are trying to get people to use their reward cards rather than everybody else’s. They call it ‘getting to the top of your wallet.’ Anybody who uses rewards credit cards (and if you pay off your balance every month, there’s no reason you shouldn’t) knows that certain cards are superior to others in various situations. Some cards offer better rewards at gas stations, some give you rewards from buying from certain merchants.

Maximizing credit card rewards is almost a sport. Some very popular bloggers have explained how they maximize their rewards and make some pretty decent money doing it. But up until now, you had to play by the banks’ rules.

Not any more…

Without making any judgment about Capital One or their credit cards per se, I can say that their Card Lab concept is pretty cool. They present you with a list of categories (e.g. reward type, interest rate). Within each category, you find various choices.

You select which choice you prefer and as you do so, choices within other categories that are no longer possible grey out. It was easy for me to find my ideal Capital One card - no annual fee, cash rewards with a bonus kicker. I don’t care about interest rate on balance transfers, introductory interest rate, or what the APR actually is.

I’d like to see this catch on with other banks. I’m lazy and something like this could get me into the rewards game more than I am now. Right now, I have a really simple rewards program with USAA that I like. Keeping track of which card to use in which situation is way to much work for me.

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If you or someone you know is going to have to borrow to pay for higher education, please make sure you exhaust all other options before turning to private student loans.

Private student loans (those taken out through private sources like banks without government backing) are one of the biggest rackets going. Just consider some of their finer points:

• Interest rate can be changed at any time for any reason
• They cannot be discharged through bankruptcy
• Origination fees are ridiculous
• Getting them in the student’s name only is difficult

In the confusion of paying for college, it’s easy to mistake private loans for the better alternatives (e.g. PLUS, Stafford, Direct). But these loans will end up costing much more by the time they’re paid off in ten years.

The second point alone should be enough to keep you away from these things. Through some very successful lobbying, banks have convinced our illustrious Congress that they deserve the benefit of special protection.

Private student loans - stay away.

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The poor unloved estate tax. It gets no respect and I don’t understand why. Flexo at Consumerism Commentary posted an article about Warren Buffett’s recent testimony before Congress on the subject. Buffett urged the Senators not to repeal the estate tax. I agree wholeheartedly (and not just because doing so puts me on Warren Buffett’s team).

Estate tax explained

The estate tax has to be the most maligned, misunderstood part of the IRS code. Critics call it the ‘death tax’ in an effort to generate popular support for its repeal. But the phrase ‘death tax’ is way misleading.

‘Death tax’ is misleading because virtually no one in America has to pay the estate tax. According to the IRS’s own data, in 2005 less than 1% of estates pay any taxes at all. The more proper term for this tax is the inheritance tax.

The estate tax is applicable when an individual leaves assets in excess of $2M (going up to $3.5M in 2009). Almost no one in the U.S. leaves that kind of money when they die.

Losing the family farm or small business

‘But what about the small business or family farm owner?’ people will ask. This classic line of attack on the estate tax goes something like this. When an owner of a family farm dies, his or her heirs will have to sell the farm just to pay the taxes on it. They’ll lose the farm!

This, in a word, is crap. The American Farm Bureau, a pro-repeal, pro-farm lobbying organization has never found a single example of this happening. Not one. Maybe a reason is because few farms reach the $2.0M threshold and of those that do, most have liquid assets available to pay the tax. Or maybe it’s that if the heirs agree to actually work the farm for 10 years, they get a $4.1M pass.

The family farm big enough to be heavily taxed by the estate tax is a myth.

So what about small businesses? Here again, hardly any are big enough to be affected by the tax. Only 4% of small businesses are bigger than $3.5M.

Some more objections punctured

• It’s double taxation. It’s not double taxation. Think about it - the gains in small businesses and family farms are unrealized gains. They’ve not yet been taxed.

• The tax rates are unreasonable. It’s true that the top estate tax rate is 48%. The problem with this line of thinking, though, is that marginal rates don’t mean very much. If you’re in the 25% tax bracket, does it mean all of your income is taxed at 25%? No, it doesn’t (see this great explanation of effective tax rates from NCN). So even if an estate does pay estate tax, the true percentage paid is much, much lower than 48%. In fact, according to the latest IRS data available, of those estates having to pay any tax, the percentage paid averaged 20%.

• It punishes success. I disagree. What it does is tax those most able to pay. It’s probably the most progressive tax in the IRS code. It only punishes success in the same way capital gains tax punishes stock market success - if you make money, you have to pay a small percentage in taxes. As Flexo says, “File this under the category of ‘problems I’d like to have one day.’”

• It will discourage investment (especially in small businesses). Let’s get real. I’d be willing to bet the estate tax consequences have never entered the mind of an entrepreneur considering starting a business. It simply makes no sense that someone would forgo gaining personal wealth because at some future time, their estate will be taxed.

No repeal

It simply boggles my mind that someone other than the handful of people actually subject to this tax would be in favor of its repeal. The estate tax brings in real revenue. When it is temporarily repealed in 2010, the federal budget will lose $56B.
There are only three ways to plug a $56B hole in a budget. You can

• raise other taxes,
• cut services,
• or borrow the money

Borrowing the money just worsens the already criminally large deficit being left to future generations to clean up. Raising other taxes must, by definition, affect more people (read you and me) than the estate tax. Or we could cut government programs - who’d like to suggest one?

If you’re in favor of the estate tax, you must either be in favor of higher deficits, higher taxes, or cutting government services.

The simple fact is the estate tax provides money for the nation from those in the best position to provide it. Incidentally, those are the very people who received so much from that nation.

Our tax system is far from perfect (or even good). But repealing arguably the most progressive tax in the code is insane.

Sources:

OMB Watch

Center for Budget and Policy Priorities

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Liz Pulliam Weston has an article on MSN Money entitled “10 ways to pay cash for Christmas.”  In it, she lists ten ways to free up money in your budget or otherwise buy presents for Christmas on the cheap.  I think she missed one, though.

How about not spending so much this Christmas season?

There are two sides to the equation - spending and saving/earning.  Why is it so hard to accept the idea of diminishing the ’spending’ side?

This year, my wife and I have decided to give each other just one present (plus small stocking stuffers).  By one present, I’m talking about a nice sweater or necklace, not a trip to Tahiti.  We’re concentrating less on us and a bit more on the kids.

We’d long ago established what we’d save throughout the year to spend around Christmas.   We have a separate savings account for this purpose that gets a monthly automatic deposit.

Not quid pro quo

Gift giving shouldn’t be a quid pro quo.  Do you judge how much someone appreciates you by the amount they’ve spent on a gift for you?  No you don’t.  Don’t you think your friends and family feel the same?  Of course they do.

Bottom line, you don’t have to spend so much money at Christmas.  It isn’t a contest.  You’re not impressing anyone by spending more than you can afford to give them a gift.  What do you think would garner a better reaction, giving a friend another personalized paperweight from Things Remembered or giving a card and explaining you’re trying like crazy to retire your student loans once and for all?

I’m not anti-gift.  I’m anti-debt.  And putting gifts on a credit card is just nuts.

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I’ve read two articles in as many days about the Alternative Minimum Tax (AMT) and how it’s fix might delay refunds for everyone due one. Whether you are affected by the AMT or not, if a fix doesn’t pass soon, you’ll likely have to wait months for your refund.

The AMT ‘fix’

The back story is that the AMT, originally designed to make sure the very wealthy pay at least some tax is, in a word, broken. As the law was written, it wasn’t indexed for inflation. As a result, more and more people are falling into the AMT’s clutches every year.

Our far-sighted federal government annually does what it is best at and dodges the issue temporarily. That is, they pass a one-year fix, each year. This year’s no exception.

The problem is they’ve taken the issue up so late in the year. The IRS has to program computers and print forms based on the current tax code. If that code isn’t set, they either have to delay that work or redo it when changes are made.

The upshot of all this is that if a compromise on the AMT is not reached very soon (like, mid-December soon), it’s likely every U.S. household due a refund will have to wait months to get it.

Don’t rush to file

So you probably shouldn’t be in a hurry to file your 2007 tax return, even if you’re owed money. If you do file early (like most due a refund do), it’s entirely possible you’ll have to file again - this time filing an amended tax return, a 1040X.

I’ve had to file a 1040X before and it’s a pain. The form is short enough and it’s not especially difficult to understand. It’s just that I absolutely hate having to do something twice. I’m not sure if this is still the case, but the year I had to file a 1040X, I had to do so on a paper form, even though I’d filed electronically.
For me, I think I’ll just keep an eye on the situation and, if necessary, file later than usual once the dust settles. Grrr.

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