Money Management

The new tax break on education expenses

QI've heard a new education-expense deduction is available this year. How does it differ from the Lifetime Learning Credit?

A Both cover tuition and related costs of college-level courses. But unlike the credit, the deduction doesn't require that the courses help prepare you for a degree or improve your job skills. You can claim the deduction—a maximum of $3,000—as long as your joint adjusted gross income doesn't top $130,000 ($65,000 if you're single).

The credit, on the other hand, starts shrinking when joint AGI exceeds $80,000 and disappears once AGI hits $100,000. (For singles, the ends of the range are $40,000 and $50,000). The credit is also limited to $1,000. But keep in mind that the credit is more effective than the deduction, because it reduces the tax you owe, not just your AGI. To figure the credit, total your eligible expenses (up to $5,000) and subtract 20 percent directly from your tax bill.

You can claim the deduction even if you don't itemize, buy you can't claim the credit and the deduction for the same.

Protecting your assets from potential claims

QI'd like to shelter my assets in case I'm sued for malpractice and lose, but a colleague says there's a law against that. What's he referring to?

A He probably means the Uniform Fraudulent Transfer Act, which most states have adopted. If you give away a large portion of your assets—for example, by putting them in your spouse's name or transferring them to an irrevocable trust—a court can repossess them if it believes your intention was to defeat actual or potential creditors' claims.

Of course, you might have other reasons for making the transfer, such as to minimize estate taxes. But if you're facing an imminent suit or you believe you could be sued in the next several years, get a lawyer's advice before divesting yourself of assets without receiving adequate payment in return.

How to benefit from new pension plan rules

QI'd like to take advantage of some of the favorable changes in retirement plan rules effective this year. Must I amend my plan to do so?

A Yes. Although you have until 2005 to incorporate the mandatory changes required by the law enacted in 2001, to benefit in 2002 from optional rules such as the increases in contribution limits, you must modify the plan by the end of the year.

To help you do this, the IRS has prepared some model amendments that you can adopt verbatim or with appropriate alterations. The agency points out that further changes may be needed to deal with issues not fully addressed in the model amendments, but adopting them will show your "good faith" in complying with the law.

You can find notice 2001-57, which contains the amendments, at www.irs.gov/pub/irs-irbs/irb01-38.pdf. For a summary of recent changes in plan rules, see "Make the most of the new tax law," Sept. 17, 2001.

When to deduct the cost of refinancing

Q I refinanced my original home mortgage after three years and paid a $1,500 prepayment penalty. I also paid the new lender $400 for an appraisal, $500 in document preparation and administrative fees, and $3,600 in points for advance interest on the new 20-year loan. Can I deduct all of this on my 2002 tax return?

A No. You can claim the $1,500 penalty as prepaid interest, except for any charges included for specific services in connection with terminating the loan—a reconveyance fee, for instance. Since the new lender's appraisal and document fees don't count as interest, you can't claim the $900 you paid for them. The $3,600 in points for advance interest on the 20-year loan is deductible, but it must be written off over the life of the loan. So you can deduct only $15 a month ($3,600 divided by 240 months). That means if you make six mortgage payments this year, you get a $90 tax deduction.

If you borrowed more than the existing balance on the old mortgage and used the excess for home improvements, you can claim an appropriate portion of the points in full for 2002.

A SIMPLE plan for a second business?

QMy employer's retirement plan covers me, but I'll earn $20,000 on the side as a self-employed consultant in 2002. Can I contribute part of my income from this work to a SIMPLE (Savings Incentive Match Plan for Employees) IRA, and if so, how much?

A Yes. Since your consulting work is separate from your salaried job, you can set up a SIMPLE plan, provided it's your only retirement plan for that business. This year you can defer up to $7,000 from your $20,000 earnings, plus a $600 employer matching contribution (3 percent of $20,000). If you'll be 50 or older in 2002, you can make an additional catch-up contribution of $500, so your total would be $8,100.

One proviso: If you participate in a 401(k) plan where you work, you can't defer more than $11,000 in the two plans together, not counting matching or catch-up contributions.

Where novice investors can find help

Q My wife's pretty savvy about financial matters, but she thinks a good book on investment fundamentals aimed at women would be particularly helpful. Any suggestions?

A Books focusing on women as investors include Everywoman's Money: Confident Investing, by Deborah Owens (MacMillan, 2001); Savvy Investing for Women: Strategies from a Self-Made Wall Street Millionaire, by Marlene Jupiter (Prentice Hall, 1999); and A Woman's Guide to Savvy Investing: Everything You Need to Know to Protect Your Future, by Marsha Bertrand (AMACOM, 2000).

For an investor of either gender, two books well worth reading are A Random Walk Down Wall Street: The Best Investment Advice for the New Century, by Burton G. Malkiel (W. W. Norton, 2000), and John Bogle on Investing: The First 50 Years, by John C. Bogle (McGraw Hill, 2000).

To gain hands-on experience, your wife might consider joining an investment club. The National Association of Investors Corporation (www.better-investing.org) can provide a list of those in convenient locations.

How to help a relative who lives at a distance

Q My mother's widowed sister, who lives alone and is getting on in years, has no one to look after her. Since I'm too far away to do it, where can I get help?

A You might consider hiring a geriatric care manager trained in nursing, social work, or an allied field. These helpers specialize in finding the best ways to meet the needs of elderly clients. A GCM can monitor your aunt's situation, call your attention to developing problems, and arrange for household help and other necessary services. Charges can vary from $60 to $300 an hour. For guidance in locating and selecting one, go to www.caremanager.org , the National Association of Professional Geriatric Care Managers' Web site.

Assuring a postdated check isn't cashed too soon

QI'll be on an extended trip, and I intend to issue a few postdated checks for scheduled housekeeping services. How can I make sure my bank won't cash any that are presented prematurely?

A Send the bank a written notice describing the checks, so it can identify them. The notice will be effective for six months and can be renewed in writing. The bank would be liable for damages if it failed to follow your instructions.

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;13:100.