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Money Management Q&As


Is there an AMT in your future? A way to put strings on a power of attorney, Points may be unwise when refinancing, Why you shouldn't use an IRA as collateral, Raising your coverage for personal liability, An alternative when a buyer can't qualify for a mortgage, How to check up on a financial adviser,When pension catch-up contributions begin, The deadline for verifying post-Sept. 11 donations, Paying a bill that seems too big, Splitting a lump-sum pension payout in two, Overseas meeting places that get the IRS nod, How to cut the cost of European rail travel, What a home add-on is worth on resale


Money Management

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Choose article section...Is there an AMT in your future? A way to put strings on a power of attorney Points may be unwise when refinancing Why you shouldn't use an IRA as collateral Raising your coverage for personal liability An alternative when a buyer can't qualify for a mortgage How to check up on a financial adviser When pension catch-up contributions begin The deadline for verifying post-Sept. 11 donations Paying a bill that seems too big Splitting a lump-sum pension payout in two Overseas meeting places that get the IRS nod How to cut the cost of European rail travel What a home add-on is worth on resale

Is there an AMT in your future?

Q I've read that the tax breaks enacted last year could increase my chances of getting hit by the Alternative Minimum Tax. Why is that, and what can I do to soften the blow?

A The law gradually reduces regular tax rates, but not AMT rates. As a result, it's becoming more likely that your tax figured under AMT rules will exceed the tax figured the regular way, in which case you'll owe the larger amount.

The AMT rules restrict some of the deductions you could otherwise claim. For example, you can't deduct state and local tax payments or most miscellaneous expenses, and medical deductions will be trimmed. Interest on home equity loans is also disallowed, unless you use the money for home improvements. So if you expect to come under AMT this year, you may want to push off such expenses to 2003, in the hope that you'll escape the AMT next year. In contrast, it may be desirable to accelerate certain types of income. Before you take action, have your accountant calculate your projected tax both ways.


A way to put strings on a power of attorney

QI'd like someone to have power of attorney over my affairs in case I become incapable of handling them, but I don't want it exercised while I'm still hale and hearty. What are my options?

A You can specify that the power will go into effect only if a doctor certifies that you're unable to manage for yourself. This is called a "springing" power. Or you can prepare a "durable" power of attorney—one that's good regardless of your physical or mental condition—but give the original document to a third party for safekeeping, with instructions to turn it over to the person named in it only under specified circumstances.

Points may be unwise when refinancing

QBy paying a couple of points up front when I bought my home some years ago, I was able to get a lower interest rate on the mortgage and came out ahead. Now that I'm planning to refinance, I've been advised to go for a no-points loan. Why change tactics?

A Because a different tax rule applies. The points on your purchase loan were fully deductible the year you paid them. When you refinance, you have to amortize the cost of the points over the term of the new mortgage. Say you're charged $4,000 to reduce the interest on a 30-year mortgage by 0.25 percent. If you're in the 35 percent tax bracket, you get a $1,400 tax saving immediately, assuming it's a purchase loan, but you'd save less than $50 a year (35 percent of 1/30 of $4,000) on a refinance loan. You might still come out ahead, but you'd be bucking the odds.

Why you shouldn't use an IRA as collateral

QI'd like to put up my Roth account as collateral for a business loan. Is that permissible?

A No. The law prohibits loans from any IRA. If you borrow from an IRA or use it as security for a loan, the money is treated as a distribution. In the case of a traditional IRA, you'd owe tax on the distribution and would have to pay a 10 percent early withdrawal penalty as well, if you're younger than 59 1/2. Similar rules apply to a Roth IRA, but withdrawals of contributed funds aren't taxed. Tax and an early withdrawal penalty would apply to the earnings, however, assuming the account is less than five years old.

Raising your coverage for personal liability

QI want to increase my personal liability coverage. My insurance company doesn't offer an umbrella policy but would charge only a small additional premium for excess-liability insurance to raise the limits on my present policy. Should I go along?

A That depends on what each would cover. An umbrella policy may give you more extensive coverage than an excess-liability policy from your present insurer. For example, the umbrella might define "personal injury" more broadly; pay the cost of defending a lawsuit; cover you overseas; and contain fewer conditions and exclusions. Excess coverage tacked onto a conventional policy may be cheaper, but an umbrella that offers extra protection could prove less costly in the long run.

An alternative when a buyer can't qualify for a mortgage

QI'm renting a small house to a tenant who'd like to buy it but can't qualify for a new mortgage or assume mine. He wants us to sign a land contract instead. How would that work?

A The buyer would contract to pay monthly installments toward the purchase price, less any down payment, plus interest for a fixed period. You would continue to make the payments on your present mortgage. Assuming you charge the buyer a higher interest rate than the bank charges you, this arrangement would let you profit not only on your equity, but on your bank loan as well.

You'd execute a deed transferring ownership of the property to the buyer, but it would be held in escrow until the buyer is financially able to terminate the contract by paying you in full. That would enable the buyer to claim tax deductions for the interest meanwhile, but would protect you against default.

How to check up on a financial adviser

QI want to check whether any disciplinary action has been taken against an investment advisory firm that isn't registered with the SEC. Where can I get such information?

A Try the SEC's database at www.adviserinfo.sec.gov , anyway. Although advisory firms with less than $25 million of assets under management don't have to register with the federal agency, its database includes those registered with a state. If you draw a blank, click on "Other Helpful Links," then on "State Regulators," to link to your state regulator's site.

You might also want to access the Certified Financial Planner Board of Standards' site (www.cfp-board.org) to confirm whether the adviser is currently certified as a financial planner or has ever been disciplined by the CFP Board.

When pension catch-up contributions begin

QI understand that anyone older than 50 can make a "catch-up" contribution of $1,000 to a 401(k) plan this year, in addition to the regular $11,000 maximum. My 50th birthday was Sept. 30, 2002, so I'll be over 50 for just a quarter of the year. Does that limit my 2002 catch-up contribution to $250?

A No. The catch-up provision in the 2001 act was fuzzy on this point, but the tax law passed in 2002 clarifies that you're eligible for this tax break as of the beginning of the year you turn 50.

The deadline for verifying post-Sept. 11 donations

QI took a tax deduction on my 2001 return for $3,000 donated to World Trade Center victims through a recognized charity, but it hasn't sent me an acknowledgment. I read recently that you're supposed to have written confirmation for contributions of $250 or more from the charity by the time you file. Will I be in trouble if I'm audited?

A No. The IRS extended the deadline to Oct. 15, 2002 for gifts made after Sept. 10 last year. Even if you didn't get a receipt by then, your deduction won't be disallowed if you can show that you made a timely request for confirmation of the amount of cash you gave (and for a description of any noncash gifts). Verification by e-mail will do.

Paying a bill that seems too big

QI'm disputing a bill from a repairman. If I send him a check for less than he's asking and mark it "paid in full," am I off the hook if he cashes it?

A Don't count on it. Some courts have held that a few words on the back of the check aren't enough to release you, even though the claimant accepts it. A better idea is to accompany the check with a clearly written statement to that effect.

Splitting a lump-sum pension payout in two

QI'm switching jobs and will get a lump-sum distribution from my present employer's plan. I want to put part of this into my new employer's profit-sharing plan and the rest into a self-directed IRA I've had for several years. If the money passes through my hands first, regulations require the trustee to withhold 20 percent of it. I know that rule won't apply if he transfers the funds directly to the two plans, but the trustee refuses to make a direct rollover to more than one plan. Is this legal?

A Yes, but you can achieve the same result via a trustee-to-trustee transfer of the entire distribution into your IRA. This avoids withholding, and you can later withdraw any amount you choose from the IRA tax-free, provided you deposit it in your new employer's plan within 60 days. Make sure in advance that your new employer's plan will accept rollovers.

Overseas meeting places that get the IRS nod

QSome members of our local medical society want to hold our annual convention in the Bahamas. Would the location affect our ability to deduct expenses for attending?

A It might. In general, you can't claim expenses for travel to a business meeting overseas unless it's reasonable for the sponsoring organization to hold the meeting there, taking into account where the active members live and where the group usually holds its meetings.

However, you don't have to prove "reasonableness" if the locale is in the North American area—including US Caribbean possessions and many other Caribbean islands that share tax data with the IRS. The Bahamas currently don't do so, although they've announced that they will, starting in 2006. For a list of approved locations, see IRS Publication 463 (available at www.irs.gov).

How to cut the cost of European rail travel

QMy husband and I plan to spend three weeks in Europe, traveling by train to half a dozen cities. Is a Eurailpass our best choice for the trip?

A No. Traveling together, you'd pay $740 each for up to 21 days in first class with that pass. A Eurailpass Flexi costing $674 per person will allow you 10 travel days, which should be ample.

You could probably save even more with point-to-point tickets, if you're content to go second-class. For example, an itinerary covering Paris, Munich, Vienna, Prague, Berlin, Amsterdam, and return to Paris would cost less than $500 at current rates. To check out other alternatives, visit www.ricksteves.com.

What a home add-on is worth on resale

QWe're thinking of adding either an enclosed sunroom or an open deck to our home. Which is likely to return a higher percentage of the cost when we sell the house?

A The deck. According to a survey of real estate agents by Remodeling magazine, you could hope to recoup roughly 75 percent of your expense for a deck, on average, compared with only 60 percent for a sunroom. Depending on where you live, a 16 x 20-foot wood deck with built-in bench and railings might run you about $6,000 and have a resale value of $4,500. A 200-square-foot sunroom with aluminum walls, double-paned windows, and insulated ceiling could cost several times that much and shrink $10,000 in value on resale.

For information on the value of other home improvements, see the latest Cost vs Value Report at www2.remodeling.hw.net/specialfeatures/default.asp .



Edited by Lawrence Farber,
Contributing Writer


Do you have a money management question that may be stumping other doctors, too? Write: MMQA Editor, Medical Economics magazine, 5 Paragon Drive, Montvale, NJ 07645-1742, or send an e-mail to memoney@medec.com (please include your regular postal address). Sorry, but we're not able to answer readers individually.


Lawrence Farber. Money Management. Medical Economics 2002;21:110.

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