At the Showroom, Don’t Forget the Deduction

As 2010 car models start creeping into showrooms and auto dealers lay on incentives in the hopes of beating the continued decline in car sales, buying a new car may start looking like an attractive option again.  And even with the end of the Cash for Clunkers program, the US government is still willing to give you a nudge in the “buy” direction.

For any new passenger vehicle purchase made between February 17 and December 31, 2009, inclusive, you may be eligible to deduct state, local, and excise taxes from your 2009 federal income tax.  The only two restrictions are: (1) the deductible taxes are limited to those levied on the first $49,500 of the purchase price (that is, you don’t get a higher tax deduction simply for buying a Lamborghini), and (2) you can only take the deduction if your modified adjusted gross income (MAGI) is less than $135,000 if you are filing individually or $260,000 if you are married and filing jointly.  The deduction is also phased out for individual filers with MAGIs between $125,000 and $135,000 and joint filers with MAGIs between $250,000 and $260,000.

Other than the limitations above, the deduction initiative is quite generous.  It covers not only cars, but also light trucks (maximum gross weight of 8,500 pounds), motorcycles, and even motor homes.  You can take the deduction for as many new cars as you buy during the period, as long as you are eligible within the two restrictions detailed above.   Furthermore, even if your state does not have sales taxes, you can still deduct fees or other local government taxes associated with the vehicle, as long as they are based on the purchase price or assessed as a per unit fee.

While this deduction may not stir car purchases in the way the now-extinct Cash for Clunkers did, it may still prove to be a nice incentive when coupled with all the markdowns on 2009 models and the extra features added to the 2010 models to boost holiday season sales.

Best Buy Makes Changes to Its Loyalty Program, and You May be Out

In July, we wrote about Best Buy’s Reward Zone loyalty program, showing how it fit into our strategies for double/triple dipping on points and bonuses when shopping.  As of the end of this week, however, the Reward Zone program may no longer be that great of a deal.

On October 31, 2009, Reward Zone rules will change so that any points accumulated through the program will expire at the end of the calendar year and members have to make a purchase every 12 months to maintain their account.  So, while it will still be the case that Reward Zone members receive one point for every dollar spent at Best Buy, and every 250 points can be exchanged for $5 in store credit (effectively a 2% discount), this program will no longer be attractive to those who visit Best Buy only sporadically and don’t make big-ticket purchases.  Of course, Reward Zone is a loyalty program and should focus on its larger, most frequent customers.  Nonetheless, even those customers will likely lose out, since, after the changes, any points over a multiple of 250 will be lost at the end of the year.  That is, if a loyal customer spent $900 at Best Buy one year, for example, she will receive $15 in store credit and the remaining 150 points will be forfeited.

Only the most loyal customers are protected from that.  You can qualify as a Premier Silver member by spending $2,500 within a calendar year at Best Buy, and your membership is carried over through the following year.  Premier Silver members earn an extra quarter-point on every purchase, and their points roll over each calendar year they remain qualified.

Reward Zone is also still a good deal for gamers.  If you enroll your Reward Zone card into the “Gamers Club,” you will get 500 bonus points for every $150 you spend on videogames, computer games, and videogame accessories at Best Buy, on top of the regular points you earn.  If you spend $300 on eligible purchases, for instance, you will receive 300 regular points plus 1000 bonus points, or $5 (with 50 points remaining) plus $20 – essentially an 8% discount.

With these upcoming changes, it is likely that Reward Zone will loose its attractiveness to most people, making it similar to the Borders Rewards, where the principal membership perks are the coupons received rather than the points system.  But unlike Borders, which sends new coupons by email on an almost weekly basis, Best Buy’s Reward Zone coupons only come every few months, and are usually a 10% discount on one item from a very restricted list.

My advice for Best Buy’s less-loyal shoppers: Create or keep your Reward Zone membership just in case you make $250 or more in purchases within a calendar year or you receive a useful coupon; but if you don’t, don’t be disappointed.  Reward Zone is clearly being redesigned for Best Buy’s most loyal customers and gamers.

Being Healthy on a Budget

Organic fruits and vegetables are healthy, but also cost more.  However, you don’t have to buy everything organic.  Below are two lists to keep handy when shopping for produce so you can maximize your budget.

The Dirty Dozen: 12 Foods to Eat Organic

  1. Peach
  2. Apple
  3. Bell Pepper
  4. Celery
  5. Nectarine
  6. Strawberries
  7. Cherries
  8. Kale
  9. Lettuce
  10. Grapes
  11. Carrot
  12. Pear

Clean 15: Lowest in Pesticides

  1. Onion
  2. Avocado
  3. Sweet Corn
  4. Pineapple
  5. Mango
  6. Asparagus
  7. Sweet Peas
  8. Kiwi
  9. Cabbage
  10. Eggplant
  11. Papaya
  12. Watermelon
  13. Broccoli
  14. Tomato
  15. Sweet Potato

Credit: Environmental Working Group

Protect Your Money by Checking Your Statements, my experience

To follow up on yesterday’s post, I thought I would add two recent experiences I had that confirm the importance of checking your credit card statements:

Restaurant Bills:  There is a restaurant I’ve been to twice – the latest one quite recently – and that after both times I went, I noticed that my credit card bill was $1 more than what I had signed for once I added tip (I usually write the total amounts on both the restaurant and my copy of the receipt, and make sure to take mine home).  Admittedly, $2 doesn’t amount to that much, but what if it were a restaurant I visited more frequently?  And what if they add $1 to every customer’s receipt?  I doubt I will ever visit that restaurant again, but this experience has taught me to keep my receipts and track the amounts charged to my credit card – just skimming through the bill and verifying that I did in fact eat at that restaurant is not enough to make sure I’m not being overcharged. 

Automatic Payments:  A few months ago I moved and had to transfer my internet and cable service, for which I had automatic payment set up.  I called the company, and was told that they would have to cancel the account linked to my old address and set up a new one with my new address.  As I checked my credit card statement this week, I noticed that there had been no charges from my internet/cable provider in the past three months.  After calling them, I found out that since they had to set up a new account, the automatic payment did not carry over, and my payments were actually overdue!  Of course, I pointed out that I had not been notified that I would be un-enrolled from automatic payment, and the charges were waived.  Nonetheless, even though it was their fault in principle, I bet that if I had gone for many months without paying my bill, they would have been less understanding.

The moral of these anecdotes?  Checking your credit card statements once a month will help you guard your money, enabling you to notice and fight back overcharges and unfair fees.

Give Your Credit Card “Junk Mail” a Chance

It goes without saying that, for security reasons, you should never throw away any regular mail you receive from your credit card company without opening it – you do not want PIN numbers or new credit cards on your name going straight to the dumpster where someone can find them.  But sometimes you might even find a useful announcement inside those envelopes.  As I wrote a while back, Discover at least once notified its customers through mail that it would be giving 5% cash back on restaurants for a month.  If you did not open that letter, you probably would only have found out about it if you diligently visit your online account.

For the same reason, emails are worth a glance.  Not only do credit card companies usually send “online alerts,” such as a notification of a new statement or a payment reminder, but they can also offer some exclusive customer deals.  In September, for example, my Citibank/ AAdvantage credit card was offering bonus miles and an extra package of channels on DirecTV for customers buying the NFL Sunday Ticket; and in October customers can get 2,500 miles for joining Netflix, a better deal than just going through, which gives just 1,500 miles (and in the webpage sent to credit card members, it is unclear whether you actually have to use your Citi/AA card to take advantage of the offer).  Besides miles offers, though, every month I also receive some potentially useful coupons for the same credit card – the latest ones include 20% off at Ann Taylor, 15% off at Charles Tyrwhitt, and $10 off a $40 purchase at Origins (the latter is valid until 10/31/2009 – just use your Citi/AAdvantage card and coupon code CITIAAOCT).

And not treating your credit card emails as spam does not have to mean having your inbox clogged – many people have a “junk mail” email they check periodically.  Alternatively, if you have Gmail, you can filter your credit card emails so that they bypass your Inbox and go straight to a “credit cards” or “junk mail” folder, which you can check every month (settings > filters > create new filter, and click “Skip the Inbox”).  And regardless of how choose to arrange your email so that you get around to the offers, you may come to find that not everything you get from your credit card company is bad news.

Saving for a Sick Day

When it comes to your health, every penny counts.  Health Savings Accounts (HSAs) can help you build up a “sick day” fund, and, because eligible contributions and distributions are tax free, get more mileage for each buck you set aside for your health.

HSAs were created by law in 2003, and are available for individuals with a High Deductible Health Plan (HDHP), whether an HMO, PPO, or any other health plan, that does not cover the first dollar spent.  A person who is covered by Medicare or who can be claimed as dependent by someone else cannot make contributions to a HSA.

Eligibility for contributing to an HSA is determined regardless of income, but the value of the deductible that defines a plan as an HDHP and the maximum annual contribution are adjusted to inflation on a yearly basis.  For 2009, an individual health plan is qualified as HDHP if it has a minimum deductible of $1,150 and a maximum deductible and other out-of-pocket expenses of $5,800 (or $2,300 and $11,600, respectively, for a family plan).  If your plan qualifies, you can contribute up to $3,000 to an HSA this year ($5,800 as a family), and, importantly, if you qualify to make contributions to your HSA, family members and other people may contribute to it on your behalf.

If you are covered by an HDHP during only some months of the year, you may make contributions to an HSA during those months (your maximum contribution will be essentially pro-rated – see the instructions to filing the IRS Form 8889 to find out how).  Alternatively, under the “last month rule,” if you are eligible to make a contribution during the last month of the tax year (generally December 1-31), you may be considered eligible for the entire year.  Be careful when invoking this rule, however, as it puts you in a “testing period” where you have to be eligible during the next 12 months as well to avoid any penalties (more eligibility and contribution rules are outlined in the IRS’s Publication 969).

For tax purposes, HSAs work similarly to 401(k)s.  You and your employer may contribute pre-tax dollars, and, as long as you use the funds for qualified medical expenses, they are tax-free.  If you are self-employed, or if you choose to make contributions on your own, the contribution, up to the limit defined above, can be deducted from your income tax.  There is no exhaustive list of “qualified medical expenses,” but it includes any expenses that would have been considered deductible had you reached your insurance’s minimum, and is extended to cover non-prescription drugs and eye glasses, regardless of whether you have vision coverage or not.

If you are eligible, ask your employer about HSAs.  According to the Kaiser Foundation’s most recent Health Benefits Survey, 18-28% of large firms (200+ employees) and 11% of small firms (3-199 employees) offer HDHPs with savings options, but only 4% and 9% of eligible employees, respectively, are actually enrolled in them.  And several financial institutions offering 401(k) options can also have HSAs, so if your employer does not offer an HSA or if you are self-employed, check with your bank or credit union.  When you are sick, the last thing you need is to worry about the cost – with an HSA you can make sure that each dollar you put aside for your health will go right back to making you feel better.

The Solution to Social Lending

You have probably been warned of the dangers of lending money to family and friends.  For the most part, this is sound advice.  According to a Money survey, 43% of readers who lent to family or friends weren’t paid back in full and 27% hadn’t received a dime.  There is obviously risk, but at the same time,  lending money to family and friends at an interest rate lower than the banks’ offers great potential for gains.

Virgin Money’s social loans (by the same Sir Richard Branson who brought you music and planes) ameliorate this risk by providing a structured way to lend or borrow money with family and friends.  The loans can be for anything, such as to start a new business, to buy a car or a home, or to finance an education.  Through its website, a lender and borrower can negotiate the terms of the loan, such as the principal, interest rate, and repayment schedule, and sign a promissory note.  Setting up the loan on Virgin Money means that there is a record of the loan.  On the one hand, the lender will have to pay taxes on the interest, which he is supposed to do anyway.  On the other, should the borrower ever default, the lender can deduct the loss from his tax return.

So whether you want to lend (after determining you have the funds to do so and the borrower has the ability to repay) or borrow some money, consider setting up a social loan.  The terms will probably be better than those from a bank, since you will be able to negotiate them with the other party. Moreover, documentation will protect the interests of both parties.  Sounds like a win-win situation to me.

When Grace Runs Out

For many of you who graduated college or any other tertiary institution this past spring, your monthly fixed costs are about to hike up.  As the 6-month grace period on your federal Stafford loans (subsidized and unsubsidized) comes to an end, it is time to revisit your payment strategies.  Here are some points to consider as you prepare yourself to tackle that debt:

  • Unemployment: If you are unemployed, call your lender immediately (before your first payment is due) and ask for deferment.  Generally, lenders will defer your loans twice, for one year each, if you are unemployed, but your loans, including subsidized ones, will accrue interest throughout the deferment period.  Once you do get a job, start paying back your student loans immediately to avoid unnecessary interest costs.
  • Consolidation: While most student loan providers have suspended consolidation offers in recent years, you can still consolidate your loans through the Department of Education’s Federal Direct Consolidation Loans program.  This program allows you to consolidate several loan types, including Stafford, Perkins, and PLUS, regardless of whether the loans are from the same lender or not.  You can choose to consolidate all of your loans or only some of them, and the interest rate of the consolidated loan will be the weighted average of the interest rates of the loans in the consolidation (The Federal Direct program’s website includes an online calculator that estimates your monthly payment and interest rate if you consolidate your loans).

Consolidation is a particularly attractive option this year if you have any variable interest loans (in general, Stafford loans disbursed between 1998 and 2006).  The interest rate on these loans changes every year and is based on the 91-day May Treasury-bill rate (2.30% + T-bill rate), which was at a historic low this year, 0.18%.  So if you consolidate all of your variable interest loans this year, you can lock in a rate of 2.48%.  Alternatively, you can consolidate these currently low-interest loans with other student loans you may have.

  • Repayment Plan: By default, lenders set your payment schedule to a “standard repayment plan” with a fixed amount due every month for 10 years, but you can change that at any time.  Two options that have existed for a while are the “graduated” and the “extended” repayment plans.  Under the former, your minimum payment amounts start low and increase every two years for 10-30 years until you pay off your loan.  The latter option, on the other hand, allows you to make your repayment period longer than what you were initially granted, up to 25 years, and can be used in combination with either the standard or the graduated repayment plan.  This extended plan is only available if you have $30,000 or more in student loans.

Now, the new plan people are talking about is the “Income Contingent Repayment (ICR) plan.”  Under this plan, your monthly payment amounts are based on your income and family size, and are generally erased after 25 years of repayment, even if you have not paid off your loan entirely.

Changing your repayment plan may mean you would spend more in interest payments.  However, if you cannot afford the monthly payment on a 10-year plan, having lower payments in your first few years or throughout an extended loan period could offer some relief.  Similarly, having a payment plan that is tailored to your income and family size should make repayment more manageable.  And in either case, paying more in interest in the long run is always a better option than being stretched out and risking having to skip on your monthly payments and incurring fees.

Your grace period is almost over, and if there’s one thing you should remember from your education when dealing with your loans, it is that the more prepared you are, the better your will do, and that procrastination, while tempting, is usually not a good thing.  Study your repayment options, assess how much you can afford in monthly payments, and be prepared when your grace period runs out.