Mailbag for Friday, February 16, 2007

Chris Farrell answers your financial questions.

TESS VIGELAND:
I'm Tess Vigeland and I'm back with our economics editor and personal finance yoda, Chris Farrell. Hello, Chris.

CHRIS FARRELL:
Oh I love that. I love yoda. You can call me that from now on.

VIGELAND:
All right. You got it. Your financial questions attempt to answer together we will.

FARRELL:
Okay.

VIGELAND:
But before we do, our web site address take down. It's marketplace.org. Click on the contact button. Or you can give us a call at our phone number, 877-275-6669, that's 877-ASK M-O-N-Y. All right, let's hit the phones. And we've got CAROLANN: calling from Salinas, California. Hi, CAROLANN:.

CAROLANN:
Hi.

VIGELAND:
So tell us a little bit about yourself. What do you do there in Salinas?

CAROLANN:
I'm a high school teacher and I work with teens at risk and their families.

VIGELAND:
Wow. How long have you been doing that?

CAROLANN:
Eighteen years. I started off working in homes of pregnant teenagers. And now I'm in the classroom and I have very few pregnant teens now. It's been a wonderful job for me. And the district has been very good to me.

VIGELAND:
Terrific. Well good for you for tackling this. So what's your question today for Chris?

CAROLANN:
I have an 18-year-old. She graduated from high school last year. She wants to go to a junior college in Wyoming, but she doesn't qualify for federal government Pell Grants. I would like to make her an independent, not include her on my taxes as a dependent. Will this qualify her for next year?

VIGELAND:
Wow. Well, Chris the financial aid system is often really complex for people to figure out whether it should be based on the parent's income or the kid's income and this certainly sounds like a situation where she could use a little help. So what's your advice here?

FARRELL:
Oh absolutely, I mean the income tax system and the financial aid system are in a competition to see which one can be more irrational. In terms of financial aid, the answer's going to be, by the way, no.

VIGELAND:
No to?

FARRELL:
Being able to have her daughter qualify for Pell grants as an independent next year. And here's the reason. The way the financial aid system defines being independent, you have to be at least 24-years-old or a veteran of the armed forces or you have legal dependents other than a partner or spouse that you provide about - I think it's about half of the financial support. Now she can still apply to the financial aid office, make her case, say there are these unusual circumstances and the financial aid office can make their own determination. But by and large, they stick to that criterion fairly strictly. Now, in terms of income tax, you can remove her as a dependent on your income tax form and what that would then allow is that she could take a deduction for higher education. That was part of the bill that was passed in December. There's the lifetime learning credit, the Hope credit, there's a number of credits that she might be able to take advantage of. So that you could still have an incentive to say that she's no longer a dependent.

CAROLANN:
And basically it's on her income taxes that she can benefit this?

FARRELL:
That's right. Okay, so that would be the tradeoff to take a look and more than likely you remove her as a dependent, she can take advantage of some of these credits or deductions. But in terms of being independent within the financial aid system, I doubt if she's going to be able to jump that hurdle.

VIGELAND:
All right. Does that provide a little bit of clarity for you?

CAROLANN:
Yes, it kind of confirms what another person told me. It's disappointing.

VIGELAND:
Yeah. Yeah, it certainly sounds like it and you know you would think that a government would be all for making it possible, however you do it, to get an education. Well thanks for the call CAROLANN:, and best of luck to you and your daughter.

CAROLANN:
Thank you. Bye.

VIGELAND:
Well Chris, hopefully with all that advice she can find something positive there at least in her income tax situation.

FARRELL:
Well and to add one other thing, it is getting tougher to pay for a college education. Nevertheless, everything we know, if you just look at the research, the college education still pays.

VIGELAND:
All right. Well let's continue speaking about colleges for a moment. Ready to dip into the e-mail bag?

FARRELL:
Oh yeah.

VIGELAND:
All right. We've got Mary from Baltimore, Maryland. Her employer is a large university. And it just announced that it lost all kinds of data - her name, her address, her birthday, social security number, bank account numbers. So her employer, the university, is telling her to check her credit report and put a fraud alert on her credit file. But that's it. So her question is what else do I need to do? And she's also wondering if putting a fraud alert on her account will hurt her credit rating. This has happened to me, so I can tell you it won't. So I'll answer that question.

FARRELL:
Right.

VIGELAND:
But what are other employers doing in this kind of situation? Is there anything else that she can do or that her employer can help her with?

FARRELL:
Well, at this point, it's almost becoming common, as you mentioned. A lot of universities have been dealing with this. The Veteran's Administration has been dealing with this. And this is the standard contact with consumers. Put the fraud alert on, which is - I guess you learned the hard way - is fairly easy to do. There are three major credit reporting bureaus, Experian, TransUnion and Equifax. All you have to do is contact one of them. Then by law, they contact the other two companies and you get a 90-day fraud alert.

VIGELAND:
And let me point out that it does expire after 90 days. So if you want that fraud alert to stay on your credit file - again, I learned this the hard way as well, you're going to need to extend that after the 90 days. And it's a good idea to do it.

FARRELL:
It is a good idea to do it and you're absolutely right. And you have to follow-up and extend it. And they each have slightly different procedures for how you extend it, but you can do it. The real key here is to look at your credit report. It's a pain. You don't like it. It makes you a little uncomfortable, but as a consumer, you don't have to worry as much.

VIGELAND:
It certainly does seem like just yesterday when ID theft meant maybe somebody got a hold of your driver's license, but it's oh so much more than that these days. If it happens to you, give us a call. We'll show you how to get through it. Click on the contact button on our web site. It's marketplace.org. Or give us a call at 877-275-6669, that's 877-ASK-MONY and we spell that M-O-N-Y. All right let's head back to the phones. We've got JERRY: from Jacksonville, Florida. Hi, JERRY:.

JERRY:
Hi, how you doing?

VIGELAND:
Good. How are you doing?

JERRY:
Oh I'm doing good.

VIGELAND:
But I understand you're not in Jacksonville today.

JERRY:
I am in Columbia, South Carolina today.

VIGELAND:
On business I assume.

JERRY:
Yes, I am.

VIGELAND:
All right. Well tell us a little bit about yourself.

JERRY:
Well I work for a company that does energy and water conservation projects. And my role in this work is to verify the savings on those projects.

VIGELAND:
And what kind of savings can you get?

JERRY:
A lot.

VIGELAND:
Yeah?

JERRY:
The bigger the facility, the bigger the savings.

VIGELAND:
So I understand your daughter is getting married pretty soon. And like every good dad, you're hoping to help her start off the right way financially. What are some of the options that you're looking at right now?

JERRY:
Well, one of the things that I was planning to do and I've been accumulating some stock over the years, almost like a saving - an automatic saving program. And I was going to use the stock to give her a little boost on her - for her wedding. You know since I've had it for period of time there's going to be some capital gains involved in it. And I thought, well I can just sell it, pay the capital gains and give her the cash. And the other option, I was just going to ask the question on is, if I were to transfer the stock to her, I was just wondering if the stock value for capital gains purposes is the value on the date that I transfer it to her?

VIGELAND:
Well Chris I know that there are limits on how much cash you can give to another person in a year. So what's his best option here - cash or give her the stock?

FARRELL:
Okay, there's a couple of things. So you have a $12,000 limit where you just don't have to worry about it. And you can give it every year. You could give $12,000 on December 31st and $12,000 on January 1 if that's how you wanted to work it out. And you can give stock. However, what does happen is the capital gain does get transferred to your daughter. So if - let's just for - we're just making up a number here. Let's say that you give $12,000 worth of this company stock and it cost you $10,000.

FARRELL:
That $10,000 basis gets transferred to her, so when she goes to sell it, whatever price it's at, let's say it's $15,000, then she's going to pay the capital gain on the difference between $10,000 and $15,000. So if you want to pay the capital gain, you can sell it yourself, and then transfer the cash. But I have one other thought to toss out there, which is run the numbers. Find out whether, you know, just depending on different tax rates, maybe she comes out a little bit ahead if you transfer the stock and let her pay the capital gains, maybe not. But anyway, if you just want to go ahead and just do little tax run just to make sure that you're just doing the smartest thing on an after-tax basis.

VIGELAND:
Chris, does that $12,000 limit per year that you can give away without any tax implications; does that apply also to the stock that you would be giving her?

FARRELL:
Yes, because you could transfer cash or any other type. Stock and bonds are usually the other two that we're talking about.

VIGELAND:
So either way, he doesn't want to give her more than $12,000?

FARRELL:
Either way. I mean technically, most of us don't have to worry about it because then you can look at your lifetime gift exclusion. But you know, I'm in the world of keep it simple. So you give $12,000 one year, and then if you want to have a little bit spill over, you just give the remainder of money the next year, and then everything is simple for everybody.

JERRY:
Sure.

VIGELAND:
When is your daughter getting married?

JERRY:
She hasn't given me a date. She gave me a season. She's going to be getting married this fall.

VIGELAND:
Good. All right, well, you've got a target, then. Well, best of luck to you, and congratulations to your daughter.

JERRY:
Okay, thank you very much.

VIGELAND:
Well, Chris, of course Valentine's Day has passed at this point, but it's so lovely to be talking about marriage and love is still in the air. Of course, now I'm talking about love for your finances. If you're having a problem spicing up your financial life, give us a call. It's 877-275-6669. That's 877-ASK-M-O-N-Y, or you can go to our website. We're at Marketplace.org. Click on the contact button. And this is Marketplace Money from American Public Media. All right, how about one more dip into the email bag, Chris?

FARRELL:
Sure.

VIGELAND:
All right, we've got Axel, from Saint Paul, Minnesota; your neck of the woods. And he's got some money invested in several mutual funds, but they are all with the same large mutual fund company. And he's wondering if, for some reason, if the company is defrauded by, say, a fund manager, or it goes bankrupt, does that mean all of his money is gone? Now, he's really thinking worst-case scenario here, but is a mutual fund company required to keep any sort of insurance like most banks are? Or is it better to get mutual funds from a lot of different mutual fund companies to minimize that kind of risk?

FARRELL:
I think there's actually layers of protection: SIPC, the Securities Investors Protection Corporation, which does provide one form of protection. The other thing is that I think his example was a fund manager absconds with the money, or some money. You know, a lot of these large mutual fund companies, they're going to make good on the situation. Of course, the smaller the company, the fewer the funds, the riskier the strategy, the greater risk that you're taking.

VIGELAND:
But what about just the general idea of keeping your mutual funds kind of spread out? I mean we always talk about diversification within your funds. But what about diversification among mutual fund companies?

FARRELL:
I have sort of a middle of the road position on that, and I think most of us end up diversifying our financial institutions. You know, think about most people. You probably have your core mutual funds, your 401K, or probably in one mutual fund company. But then, you have your checking account, savings account with another company. There might be an investment over here, and you end up putting some money into a different mutual fund company. So I think many people actually end up with a diversified portfolio in terms of institutions, and I do recommend that. I would be working with two, three, four financial institutions, and have some diversification.

VIGELAND:
All right. Well, that's all the questions that we can take for this week's show, but please do leave your question for a future program on our voicemail. It's 1-877-275-6669. That's 877-ASK-M-O-N-Y, or visit the contact page on our Web site. That's Marketplace.org. Hey, Chris, thanks so much for all the advice.

FARRELL:
Thanks a lot.

VIGELAND:
You're listening to MARKETPLACE MONEY from American Public Media.

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