Combining Education Tax Benefits?

If you are thinking of going back to school but dread the prospect of having no income for 2-5 years, I have at least two reasons to look forward to returning to the classroom.

  1. Previously MUYF has discussed the value of investing in qualified tuition plans to pay for further studies.  Also known as 529 plans, your contributions grow tax-free and can be used to pay for any college, university, vocational school, or other postsecondary educational institution.  The list of qualified education expenses under 529 is pretty broad and includes money used for books, room and board, and transportation.  But for the money you did use to pay for tuition or any required education expenses, you can also claim it back through the lifetime learning credit.  This is a pretty nice combo: your money grew tax-free and you get to claim it back as a dollar for dollar reduction on your total tax.
  2. If you had to take out a loan, you can still claim the lifetime learning credit for the amount of the loan that went towards tuition or any required education expenses.  This is not as good a deal as #1, but think of it this way: you are already getting a tax break and you haven’t even started repaying the loan yet.  And when it’s time to repay the loan, any interest you have paid are tax deductible.

Business Negotiations – Not Just for the Board Rooms

Be it recession or not, you should always try to negotiate with any service providers you use (such as cell phone, cable, internet, or car rental companies) and ask to waive or reduce any fees that you found superfluous.  For example, I usually ask my cellphone provider to waive the activation fee each time I upgrade to a new phone.  Having already paid for the new cellphone and signed up for another two-year contract, I don’t see why I have to pay another $20 for the activation fee.  Similarly, I recently asked my internet service provider to waive its installation fee.  This is a fee that I have already paid twice – when I first signed up for the internet service and when I moved a year later.  While my internet service provider was unable to waive the fee entirely, I got it reduced from $40 to $20.

When negotiating, try to be polite and clear on your reasons why you feel a certain fee should be waived or reduced.  If the first representative you speak with isn’t able or doesn’t have the authority to offer you a discount, ask to speak with his or her manager.  And be sure to get the complete name of the person who is able to offer you the discount, so you can refer back to this person in case of any problems.  If you have been a frequent or long-time customer, it makes your case that much stronger, since they would rather keep your patronage than have you leave.  Finally, be reasonable about what you ask for and keep in mind that the companies you are dealing with are businesses that are trying to turn a profit.  The recession might have ended, but consumers still have the upper end when negotiating for better deals, so good luck.

How to Own a Piece of the US Government’s Debt

With the instability of the market – predicted to last for at least another few months, but more likely longer – more and more people are turning to Treasury securities to protect their money.  While T-bills, notes, bonds, and the newer TIPS (Treasury Inflation-Protected Securities) carry low interest rates relative to the market, they are good options if you are looking to preserve rather than increase your wealth.

Treasury bills, notes, and bonds generally work the same way, and are classified according to their maturity (the time it takes for the principal to return to the owner without any penalties): T-bills are short-term securities, with a maturity of up to 52 weeks, Treasury notes have maturities between 2 and 10 years, and Bonds mature in 30 years.  Unless there are expectations of deflation, T-bills are sold below face value, and at maturity you can redeem them for the face value (the interest you earn being the difference between the two).  Treasury notes and bills are similar, but also pay interest – fixed at the time of purchase, based on the face value of the security – to holders every six months.

First issued in 1997, TIPS have maturities of 5, 10, and 20 years and pay interest every six months.  But the difference between it and Treasury notes and bills is important – designed to protect investors against inflation, the TIPS interest rate is pegged to the Consumer Price Index (CPI – a standard measure of inflation).  The principal value of the TIPS will fluctuate according to hikes and dips in inflation, and the interest rate will vary accordingly.  At maturity, however, the principal returned will be at least the value determined at time of purchase, even if it goes through deflation.  So while the interest rate on TIPS is frequently lower than that found in Treasury notes and bills, investors are able to take advantage of increases in inflation and still be assured that they will, at a minimum, get a fixed principal back.

If you are interested in buying any of these Treasury securities, you can go through a financial institution or a broker, invest in a conservative fund that includes notes or bonds, or buy directly from the US Treasury through TreasuryDirect.  As all of the securities are issued through auctions scheduled throughout the year, if you use a broker, you may be able to determine the rate and amount of securities you get.  But TreasuryDirect may be a good option for smaller investors, as it requires a minimum purchase of only $100, and while you do not get to participate in the auction directly, you can still set the value under which and the interest rate over which you are willing to purchase the auctioned securities.

The Score That Really Matters

While your SAT, GRE, GMAT, MCAT, or LSAT scores will cease to matter once you have graduated from college or graduate school, there is one score out there that will follow you the rest of your life: your FICO credit score.  This number is used by various parties,  from prospective landlords and employers to institutional lenders to insurance agencies, to determine your credit riskiness.  A higher score (850 is the maximum) shows that you are fiscally responsible, making you less likely to default on monthly payments.  This translates into lower interest rates and a higher credit line, and may mean you don’t have to give as much in security deposit or down payment.  Most people don’t go past 800, so any score above 750 is generally considered to be pretty good.

Your FICO credit score is calculated by weighing different types of credit data, such as payment history, amounts owed, length of credit history, number of recently opened accounts, and types of credit used.  Therefore, some of the easiest ways to improve your credit score is to pay your bills on time (even if just the minimum), lower the ratio of your outstanding debit to your credit limits, try to keep an older credit card active by using it to make a purchase every so often (even if the credit card doesn’t provide much rewards), and not open new credit cards that you don’t need.

Unfortunately, your credit report does not come with the score for free.  The best way to get your credit score is through www.myfico.com.  For $16, it will give you your credit score, tell you whether it is good or bad, and simulate how it may change.  And you should try to purchase your score from all three credit bureaus (Experian, Equifax, and TransUnion) at least once, since each bureau calculates the score slightly different.

Amtrak Extends Northeast Summer Deal into the Fall

Two months ago, we wrote about Amtrak’s summer sale for travel in the Northeast corridor.  With the 25% discount offered, taking the train became a slightly more accessible option, with a one-way New York – DC trip going for $49 and Philadelphia- New York going for $34.  This deal was due to run out just before Labor Day, but has now been extended for another four months, to December 16, 2009.  The discounted fare is calculated automatically (no coupon codes necessary), and, to qualify, tickets must be purchased 14 days in advance.  There are blackout dates around Labor Day (September 4 and 7) and Thanksgiving Day (November 24-25 and 28-30), but otherwise this extension is great news all around.

Bring the Picnic Blanket: This Weekend, Last Call for Free Visits to National Parks

Visiting a national park is among one of the cheapest day-long recreational activities available, but this weekend it will be even higher up that list.  August 15-16 is the last of three summer weekends in which the National Park Service will be waiving entrance fees for over 100 national parks around the country.  Participating parks include Yosemite and Yellowstone as well as the Appomattox Court House in Virginia (visit the reconstructed McLean House, where General Robert E. Lee surrendered and ended the Civil War) and the Eleanor Roosevelt and the Home of Franklin D. Roosevelt National Historic Sites, both in New York.  Several concessioners inside the parks are also participating, offering discounts and free items to visitors.  With good weather and longer hours, the summer is a great season to visit a national park, and getting in for free can only make it better.

Visit the U.S. National Park Service website for a list of participating national parks, and click here for concessioner deals.

Tax-Deferred Plans for the Self-Employed: sometimes it is nice just knowing you have the option

In general, we believe that, if your employer does not match your contributions to a 401(k), a Roth IRA is a better option.  It can move with you as you switch employers and grows tax-free.  Whether you are employed or self-employed, you may open and contribute to a Roth IRA as long as you have an income and your MAGI is below $120,000 if you are single or $176,000 if married and filing jointly.  But if you are self-employed, you should know that you are not barred from having a 401(k) as well, just like individuals with employers – you have the option of having a tax-deferred retirement plan though a SEP IRA or a Keogh plan.

SEP IRAs and Keogh plans are designed for small businesses, and for the self-employed they work basically the same way.  You can set them up through a financial institution, and your maximum contribution depends on your net earnings through self-employment.  As your contributions will be tax-deferred, you may deduct a portion of them in your income taxes using a worksheet that considers your income as well as the deduction you already get for your self-employment tax (check out the IRS publication 590 to learn more ).

While a Roth IRA may be easier to set up and manage, knowing that you can also have a 401(k) as a self-employed individual may nonetheless come in handy if you make or expect to make more than the income limit for contribution to a Roth IRA, or if you would like to contribute more to retirement than the $5,000 allowed under the IRA plans.