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Financial Beat


Telephones; Retirement; Taxes; Travel Tidbits; Stocks; Mutual Funds

Financial Beat

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Choose article section... Telephones Good news on long-distance rates Retirement Now you can earn more money if you work past 65 Taxes Better late than never doesn't always cut it when claiming a refund Travel Tidbits Stocks Companies incorporated in Delaware are worth more Mutual Funds Nasdaq vs S&P 500 Overlap between a typical Nasdaq-100 index fund and an S&P 500 index fund


By Bernice Napach, Senior Editor

Good news on long-distance rates

Within the next few months, you'll probably see a decline in your long-distance phone costs, along with a phone bill that's much easier to understand. A coalition of long-distance phone companies has developed a package of reforms that will be implemented as soon as the Federal Communications Commission approves them. Ultimately, these changes will increase competition in the telephone marketplace, which should cut costs even further.

Minimum monthly charges, which many customers currently pay even if they make few long-distance calls, will be eliminated for five years. Companies that don't levy these fees, such as Sprint, promise to retain the policy for five years.

Access charges levied by local phone companies on long-distance outfits will be cut over the same five years, to the tune of $2.1 billion overall. Long-distance carriers have pledged to pass those savings on to customers, which should reduce your long-distance charges—though it may raise your local phone bill.

At the moment, access charges help subsidize phone service for rural customers. Under the plan, a $650 million fund will be established for that purpose, which would remove those hidden costs from current residential charges.

Charges for each phone line running into your house, known as subscriber line charges, will initially be cut, then allowed to rise moderately each year through 2003. Over time, charges for all lines will be the same. Currently, extra lines cost more than your primary line.

Members of the group, called the Coalition for Affordable Local and Long Distance Services, include AT&T, Bell Atlantic, BellSouth, GTE, SBC, and Sprint.

Now you can earn more money if you work past 65

Beginning this year, the earnings limit for Social Security recipients who continue to work will be eliminated. Congress voted unanimously to abolish the limit, effective Jan. 1, 2000, and President Clinton has signed the bill.

It gets rid of the penalty for recipients who continue to work from 65 through 69. Until recently, they lost $1 for every $3 earned above $17,000 annually, in effect paying an additional 33 percent tax on their earnings.

Originally, the penalty was imposed to encourage older workers to leave the job market and make room for younger ones. Now, with the unemployment rate at an historic low, that's no longer a concern. Critics called the penalty unfair because it applied only to earned income, hurting those seniors who need to continue working. People who receive investment income, such as interest, dividends, and capital gains, continued to receive full Social Security payments. The penalty also was difficult for the government to administer.

Better late than never doesn't always cut it when claiming a refund

The Supreme Court has reaffirmed a long-held deadline for claiming federal income tax refunds. In general, to claim a refund, you must request it within three years from the date when you should have filed your tax return, or two years from the time you actually paid your tax, whichever is later.

Taxpayer David H. Baral thought that he qualified for a refund based on the second stipulation. He filed his tax return for 1988 on June 1, 1993—almost four years after it was due—and claimed a refund for $1,175, based on excessive withholding and estimated taxes. (His taxes had been due on Aug. 15, 1989, because he had previously filed for an extension.)

The IRS refused to refund the money because the "look-back" period had expired. In Baral's case, that period stretched from June 1, 1993, back to Feb. 1, 1990. It did not reach back to 1989.

Baral disagreed, arguing that withholding taxes and estimated tax payments are not income taxes until a return is filed. Therefore, payment of his taxes did not occur until June 1, 1993, when he filed his return (thus he had until June 1, 1995, to claim the refund). He appealed the IRS's decision to Federal District Court, then the Court of Appeals, and finally the Supreme Court.

The high court agreed with the lower ones, ruling that withheld and estimated tax payments are considered made on the date that taxes are due, which in Baral's case was April 15, 1989.

Travel Tidbits

• From the Dept. of Crazy Rules: Don't expect your airline to save your assigned seat if you arrive past the original departure time. One traveler checked in hours later because she was told the flight had been rescheduled due to bad weather. It was, and she hadn't missed it. What she did miss, however, was her assigned seat, which the airline had given away. The carrier's excuse: The passenger had failed to check in at least 20 minutes before the original departure time.

• Before you book a cruise, find out whether the company offers any sort of guarantee to refund fares to dissatisfied passengers. Carnival Cruise Lines has one. It guarantees disgruntled passengers who want to jump ship a refund on the unused portion of their cruise, plus return airfare to the ship's departure port. Sometimes the guarantee is all but meaningless, however. That's because ships that fly a foreign flag, like the Carnival fleet, must abide by an 80-year-old US law that prohibits them from picking up passengers in one US port and dropping them off in another.

When a New York woman recently asked to get off in the US, a member of the crew had to say No. By the time her ship arrived in the first foreign port, only two days were left to the cruise.

• You can now claim up to $2,500 for baggage lost by an airline on a domestic flight. The Department of Transportation recently doubled the maximum claim.

—Department of Transportation, Consumer Reports Travel Letter

Companies incorporated in Delaware are worth more

Ever wonder why so many companies are incorporated in Delaware? More than 250,000 firms, accounting for about 60 percent of all public shares, are registered in this small Eastern state largely because it is a corporate tax haven compared with other states.

Delaware doesn't charge corporations sales or personal property tax, doesn't tax shares of stock (including inherited shares held by nonresidents), and has a relatively low franchise tax. It also allows companies to maintain their principal place of business outside the state and to incorporate with no minimum amount of capital. Its Chancery Court, which deals exclusively with corporate business, has a reputation for reaching reasonable and fair conclusions with due speed.

Now there may be another reason for companies to incorporate in Delaware. A recent study contends that stocks of Delaware companies are worth more than similar firms incorporated elsewhere. In 1996, for example, the median market value of Delaware companies was 5 percent greater than that of other US firms.

Robert Daines, a professor at the New York University Center for Law and Business, who conducted the study, attributes this premium to state laws that pose fewer obstacles to takeovers than laws in other states. As a result, "Delaware firms receive significantly more bids on average . . . and are more likely to be acquired than firms incorporated in other jurisdictions," he says.

More bids and acquisitions increase the demand for shares of Delaware companies, which boosts stock prices. At the same time, they may inspire management to keep share prices high to prevent a takeover.

The opposite is true for companies incorporated in states such as Ohio, Pennsylvania, and Massachusetts, which have enacted strong anti-takeover laws, says Daines. They receive far fewer bids, and their shares are worth less than those of other firms.

Mutual Funds
Nasdaq vs S&P 500

Despite its recent dip, the Nasdaq is always tempting. Sure, some of its stocks are vulnerable, some are volatile. Microsoft is a good example. But these are high-flying times, and to many, the Nasdaq means promise and excitement. So why not dump your stodgy S&P 500 index fund in favor of a Nasdaq-index investment?

Because the risks are greater than they appear, says Peter Di Teresa, an analyst at Morningstar, the mutual fund rating company. Consider:

Nasdaq index funds and "Nasdaq 100" shares—an index-tracking stock that trades on the American Exchange—are based on the Nasdaq 100 Index, which is more risky than the S&P 500 index. It contains 80 percent fewer stocks than the S&P 500, and its top 10 stocks are worth 45 percent of the entire index.

There are only a handful of Nasdaq-100 and OTC index funds compared with dozens of S&P 500 index funds, and they generally charge higher fees and require larger minimum investments than most S&P 500 funds.

Most Nasdaq 100 index funds are leveraged, which means they borrow to buy additional stocks on margin. This increases their investment risk and interest rate risk.

Many stocks in the Nasdaq 100 are also part of the S&P 500. If you move from an S&P 500 fund to a Nasdaq 100 fund, you'd still own many of the same stocks, but you'd have taken on more risk. The chart below illustrates how much overlap there is in the 15 largest holdings of both funds.


Overlap between a typical Nasdaq-100 index fund and an S&P 500 index fund

% of net assets in a Nasdaq fund— the Rydex Series Trust OTC Fund
% of net assets in an S&P 500 fund— Vanguard 500 Index Fund
Cisco Systems
Sun Microsystems
MCI WorldCom
General Electric
Dell Computer
Nextel Communications
JDS Uniphase
Exxon Mobil
Global Crossing
% of assets overlapping
Total net assets


Bernice Napach. Financial Beat.

Medical Economics


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