Thanks to the Fair and Accurate Credit Transactions Act, passed in 2003 to battle the increasing incidence of identity theft nationwide, you can get free copies of your credit report once a year from each of the major credit- reporting agencies, Experian, Equifax and TransUnion.

To order your reports, visit the Website annualcreditreport.com. Be sure you use this official web address--scams are becoming rampant, often advertised through pop-up ads or spam e-mail. At the site, you can either see the information online or download a request form and mail it in; you will receive your reports within 15 days. Or you can order your reports by calling the toll-free number, 1-877-322-8228.

When you request your credit report, also called a credit file disclosure, you'll be provided with all the credit information about you that could be given by the consumer reporting company to a third party, such as a lender. The documentation also includes a record of everyone who has received a consumer report about you from the consumer reporting company within a certain period of time ("inquiries"). The disclosure includes certain information that is not included in a consumer report about you to a third party, such as the inquiries of companies for pre-approved offers of credit or insurance and account reviews, and any medical account information that is suppressed for third party users of consumer reports.

You're entitled to receive one free credit file disclosure every year from each of the consumer credit reporting companies. Whether you order all three at once, or one now and others later, is your choice but the website suggests that the advantage of ordering all three at the same time is that you can compare them. The advantage of ordering one now and others later, however (for example, one credit file disclosure every four months), is that you can monitor any changes or new information that may appear.

A credit score is a number that helps lenders predict how likely you are to make payments on time. The score, which is based on the information in your credit report, affects whether you can get credit and what you pay for credit cards, auto loans, mortgages and other types of credit. For most kinds of credit score; higher ones mean you're more likely to be approved and pay a lower interest rate. For more information, including boosting your scores, visit http://www.pueblo.gsa.gov/cic_text/money/creditscores/your.htm

The Federal Trade Commission (FTC) warns consumers to be on the alert for companies that claim to be able to repair your credit. These outfits, commonly called credit clinics, don't offer any service that you can't accomplish yourself. Be suspicious of an organization that offers to create a new identity and credit file for you. Warning signs to look out for are if an organization:

• Guarantees to remove late payments, bankruptcies, or similar information from your credit report.
  
  
• Charges a lot of money to repair your credit.
  
  
• Asks you to write a credit reporting company and repeatedly seeks verification of the same credit account information in your file, even though the information has already been determined.
  
  
• Is reluctant to give out its address or pushes you to make a decision immediately.

There are many options when it comes to choosing how your annuity will be paid to you. It's important to choose a payout option carefully, since the method you choose can make a big difference in how much money you end up receiving. Here are brief summaries of some of the payout methods:

1. The fixed-amount payment gives you a fixed monthly amount — chosen by you — that continues until your annuity is used up. The risk with this option is that you may live longer than your money lasts. If you die before your annuity is exhausted, your beneficiary gets the rest.

2. The fixed-period payout pays you a fixed amount over the time period you choose. For example, you might choose to have the annuity paid out over ten years. If you die before the period is up, your beneficiary gets the remaining amount.

TIP: If you are seeking retirement income before some other benefits start, this may be a good option.


3. With lifetime or straight-life payments, the payments continue until you die. There are no payments to survivors. The risk with the life annuity is that you will die early, thus leaving the insurance company with some of your funds.


TIP: The life annuity gives you the highest monthly benefit of the options listed here.


4. The life with-period-certain method gives you payments as long as you live (as does the life annuity) but with a minimum period during which you or your beneficiary will receive payments, even if you die earlier than expected. The longer the guarantee period, the lower the monthly benefit.

5. The installment-refund payout pays you as long as you live and guarantees that, should you die early, whatever is left of your original investment will be paid to a beneficiary.

6. The joint- and-survivor option provides monthly payments during the annuitants' joint lives, with the same or a lesser amount paid to whoever is the survivor.

What's the best method? It depends on your individual circumstances.

Caution: It is wise to consult with an expert who is familiar with your financial situation before choosing a method.


We hope that this simplified discussion of annuity payouts is helpful to those who must choose amount payout methods.

Many businesses can benefit from having a personnel manual (employee manual). Check this list of benefits to see whether your business should look into maintaining such a manual:

• An employee manual may help to prevent unnecessary lawsuits. Keeping an up-to-date summary of your business’s employee rules, policies, and benefits may help you to avoid litigation by employees or former employees. At the very least, the manual will help you in defending against such suits.
  
  
• Having employee policies and benefits in writing tends to make employees feel that the employer is likely to deal fairly and impartially with them. This leads to improved employee morale.
  
  
• An employee manual tells employees what is expected of them, thus helping to ensure that employees will behave in a manner that is good for your business.

You will need professional help in preparing an employee manual. Areas covered might include: benefits, sick leave, vacation, hours of work, dress code, and use of alcohol or narcotics in the workplace. Due to the myriad federal and state laws that govern the treatment of employees, the help of a qualified expert is a must.

With a living trust, you transfer assets to the trust, usually making your intended heir a beneficiary. Then, upon your death, the assets pass automatically and directly to your intended beneficiaries. Estate planners often tout the living trust as a means to avoid probate and bestow other benefits upon the heirs of an estate. Unfortunately, they often fail to explain the disadvantages.

So that you can discuss with your advisors whether the living trust suits your situation, here are its pros and cons:

The Pros

• You can avoid probate on the assets involved.
  
  
• The living trust can serve as a more effective version of a power of attorney in case you are incapacitated, as long as it includes detailed instructions on how your finances should be managed.
  
  
• Assets held in trust are not open to public scrutiny (unlike assets undergoing probate).
  
  
• A trust is not likely to be challenged in court by disenchanted heirs.

The Cons

• Living trusts can cost up to $3,500 to set up. Probate may not cost as much as that, depending on the size of your estate. Further, you must pay annual fees to the trustee (1% to 2% of the trust principal) unless you yourself serve as the trustee.
  
  
• You are subject to the same income, capital-gains, and estate taxes on the assets you put in a living trust as on assets you own directly.
  
  
• Creditors can access assets in a living trust more easily than assets undergoing probate. There is a time limit during which creditors must file a claim against probated assets; there is no such time limit on assets you pass to your beneficiary through a trust.
  
  
• The title must be changed on each asset that is placed in the trust. For stock, you can have the bank or brokerage send you a form. For real estate, you’ll have to pay a lawyer to transfer the title.

Note: The title to a home may be required to be in an individual’s name by a mortgage lender.

Until now, you could get a six-month extension to file your Form 1040 individual income tax return, but it was a two-step process. First you filed a Form 4868 by April 15, which automatically gave a four-month extension (to August 15). If you needed still more time, you could by August 15 request a further two-month extension (to October 15), giving your reason for needing extra time, on Form 2688. About a third of those using Form 4868 went on to file Form 2688.

Starting with the 2005 return due next April 15, filing Form 4868 will give you an automatic six-month extension (to October 15). Form 2688 will be scrapped (no extension beyond October 15).

The good news, obviously, is the saving in trouble and cost, for taxpayers and IRS, from eliminating the second filing step. But note this—

Caution: The Form 4868 filing extension calls for an estimate of the year’s tax liability. If tax paid for 2005 through April 15, 2006 isn’t at least 90% of the 2005 actual liability, a tax penalty will be imposed, absent reasonable cause for the late payment. And, of course, interest will run on any underpayment, regardless of the Form 4868 extension.

TIP: To avoid risk of penalty for 2005 taxes, you should have a good approximation of 2005 tax due, and have paid that amount (or around 90% of it), when the Form 4868 is filed. You may want to work with a tax professional on this.

TIP: If you get an extension but are ready to file before the extension period is up, do so. If you owe tax, filing and paying the tax stops the running of interest—and of the late payment penalty if applicable. If you’re owed a refund, interest from IRS to you won’t start running until 45 days after you file.

Other returns extended. For income tax returns for estates, trusts and partnerships, it also took two steps to get a six-month extension (especially complicated for estates). For returns of these entities due after 2005 (including fiscal 2004-5 returns due after 2005), automatic six-month extensions are available by filing Form 7004.

Partnership returns are in effect information returns, since partnerships owe no income tax.

Note: Partnership extensions can be something of a nuisance for their partners who want to file their individual Forms 1040 on time. Partners may get needed information after they have filed, and may need to file amended 1040s. This problem happened to some extent even before the automatic extension.

Gift tax. Gift tax return due dates are automatically extended where the taxpayer extends his or her income tax return. It is possible to extend the gift tax return without extending the income tax return. Automatic six-month gift tax extensions are obtained by filing Form 8892. For 2005 returns and after, taxpayer no longer need explain why an extension is wanted.

Form 5500EZ. The due date for this form, for single-participant self-employed retirement plans, is automatically extended to the date the self-employed person’s extended income tax return is due.

Last year Congress decided it could help keep U.S. jobs from moving abroad by creating a special U.S. tax deduction for domestic production activities. So, for this year 2005 and after, businesses generally, including small and self-employment businesses, can get a modest tax reduction for continuing to do what they were doing anyway: producing goods in the U.S.


Note: Of course, new domestic production businesses get the deduction, too.


Congress threw the IRS (technically, the U.S. Treasury Department) the difficult task of applying the new concept of domestic production activity across the vast spectrum of U.S. business activities. As these interpretations emerge, some students of the effort think the government has been generous to real estate construction and sales.

In general. First for how the deduction works for business generally. In figuring its deduction a business would start with its gross receipts, and eliminate gross receipts unconnected with domestic production. Domestic production is manufacturing, agriculture, mining, construction, architectural and engineering services, and some other activities. Examples of gross receipts unconnected with domestic production are investment income, services income (other than architectural and engineering) and income from production overseas.

That leaves gross receipts from domestic production. From this, subtract deductions properly allocable to those receipts, which would include product-specific expenses and a ratable proportion of overhead.

The remainder is domestic production income. Your domestic production deduction is 3% of that income, or 50% of your Form W-2 employee payroll if that’s less. (The 3% deduction for 2005-2006 is scheduled to rise to 6% for 2007-2009 and 9% thereafter.)


Note: A 3% reduction in income will often equate to about a one percentage point reduction in tax rate.

Warning: The deduction is reduced if the business has overall losses from non-domestic production activities. Here, the domestic production deduction will be taken against taxable income (or adjusted gross income, in the case of an individual), instead of against (the higher) domestic production income.

For many businesses, these computations won’t be easy. So far the relevant tax return form for claiming the deduction (Form 8903, currently in a draft version) doesn’t help you figure domestic production gross receipts.

Real property builder/developers. Real property construction and development in the U.S. is a domestic production activity (though there’s generally not much danger of its moving abroad). But where a developer buys land, adds dwellings and other improvements, and then sells the dwellings and improvements with the land, determining how much is the “production” income is a problem.

What counts as production income is income from constructing the buildings (labor, materials, etc.), and infrastructure such as roads, sewers, sidewalks and utility lines. It’s not the land (no entrepreneur “produced” the land), or capitalized items related to the land, such as rezoning or demolishing structures acquired with the land.

Since what the developer gets for land isn’t domestic production gross receipts, the developer when figuring the deduction wants the smallest possible part of the sales price allocated to land. He or she could get an appraisal of land value, but since domestic production income is figured item by item (for example, each dwelling with its land), this can be costly and, maybe, vulnerable to later IRS challenge.

To the rescue: IRS offers a failsafe method for figuring land value. Take the cost of the land (including capitalized land costs) and add a specified percentage appreciation factor: 5% for land held 0 through 5 years before sale; 10% for 6 through 10 years; 15% for 11 through 15 years.
You can use the specified factor for property held 15 years or less (no factor is allowed for older property), regardless of the land’s actual value. On the other hand, if appraised value is less, you can use the appraised value.

More IRS relief. If more than 95% of construction gross receipts is from domestic production, it is all treated as domestic production gross receipts.

Note: This domestic production deduction is a new concept affecting many businesses, whose complexities and opportunities for distortion are in the law itself, and which IRS is trying to clarify and rationalize. Trade associations and taxpayer representatives will be working with IRS to make the deduction function as intended.

TIP: Help from a tax professional will be especially important in understanding and applying the new law.

Many tax benefits are available to help you pay higher education costs, whether for your children or yourself. Because of the variety of benefits and programs, the amounts often involved — and the fact that the use of some benefits can preclude others — this area is one of the most complex an individual can face. This first in our series on education tax breaks considers a leading program for building savings for higher education. Later installments will consider other such programs and benefits available as and after the higher education takes place. In this area more than most, professional guidance is necessary.

COVERDELL EDUCATION SAVINGS ACCOUNTS (SECTION 530 PROGRAMS) (FORMERLY, EDUCATION IRAS)

You can contribute up to $2,000 each year to a Coverdell education savings account (Section 530 program) for a child under 18. These contributions are not deductible, but they grow tax-free until withdrawn. Contributions for any year (say 2005) can be made through the (unextended) due date for the return for that year (April 15, 2006).

Only cash can be contributed to a Section 530 account and you cannot contribute to the IRA after the child reaches his or her 18th birthday.

Anyone can establish and contribute to a Section 530 account, including the child, as long as the contributor’s modified AGI doesn’t exceed $220,000 for a joint return or $110,000 for a single filer. You may establish 530s for as many children as you wish, and the child need not be a dependent — in fact, he or she need not be related to you. But the amount contributed during the year to each account cannot exceed $2,000. This maximum contribution amount for each child is phased out for AGI between $190,000 and $220,000 (joint) and $95,000 and $110,000 (single).

Note: A 6% excise tax applies to excess contributions. These are amounts in excess of the applicable contribution limit (($2,000 or phase out amount) and contributions for a year that amounts are contributed to a qualified tuition program for the same child. A qualified tuition program, sometimes called a Section 529 program, is a tax-favored state program to prepay education costs. It will be discussed in a later installment in this series.The 6% tax continues for each year the excess contribution stays in the 530 account.

The child must be named (designated as beneficiary) in the Coverdell document, but the beneficiary can be changed to another family member (for example, to a sibling where the first beneficiary gets a scholarship or drops out). And funds can be rolled over tax-free from one child's account to another's. Funds must be distributed not later than 30 days after the beneficiary's 30th birthday (or 20 days after the beneficiary's death if earlier). For "special needs" beneficiaries the age limits (no contributions after age 18, distribution by age 30) don’t apply.

Withdrawals are taxable to the person who gets the money, with these major exceptions: Only the earnings portion is taxable (the contributions come back tax-free). Also, even that part isn’t taxable income, as long as the amount withdrawn doesn’t exceed a child’s "qualified higher education expenses" for that year. The definition of "qualified higher education expenses" includes room and board and books, as well as tuition. In figuring whether withdrawals exceed qualified expenses, expenses are reduced by certain scholarships and by amounts for which tax credits (see Tax Credits, below) are allowed. If the amount withdrawn for the year exceeds the education expenses for the year, the excess is partly taxable under a complex formula. There’s another formula if the sum of withdrawals from this 530 program and from the qualified tuition (Section 529) program exceed education expenses.

You as the person who sets up the Section 530 account may change the beneficiary (the child who will get the funds) or roll the funds over to the account of a new beneficiary, tax-free, if the new beneficiary is a member of your family. But funds you take back (for example, withdrawal in a year when there are no qualified higher education expenses, because the child is not enrolled in higher education) are taxable to you, to the extent of earnings on your contributions, and you will generally have to pay an additional 10% tax on the taxable amount. However, you won’t owe tax on earnings on amounts contributed that are returned to you by June 1 of the year following contribution.

Investment policy

You may choose and change investments as freely.

TIP: Check with your financial adviser about using both the Section 530 program, which has wide investment options but limited ($2,000 or less) contribution/investment amounts, and the Section 529 program, which has limited investment options but allows higher contribution/investment amounts.

Elementary and secondary schools

Section 530 programs can be used to build up funds for primary and secondary education. The tax rules are similar to those for higher education: withdrawals taxable to the extent of earnings on contributions, except tax-free up to the child’s qualified elementary and secondary education expenses. These expenses qualify whether the child attends a private, religious or public school. Expenses such as room, board, tuition, transportation and uniforms will qualify only where connected with private or religious schools, but some expenses — books, computers, educational software and internet access — apply as well to children in public school living at home.
The age limits for higher education apply here too: no contribution after child reaches age 18, distribution at age 30 except for special needs beneficiaries. Withdrawals in excess of qualified education expenses are taxable under a special formula.

Are you planning to buy mutual fund shares before the end of the year? If so, try to find out whether the fund is planning a year-end capital gains distribution. You may wish to wait until after the fund makes its year-end capital gains distribution before investing in new shares. By waiting, you can avoid an extra tax liability for the year 2005.

Mutual funds must, by law, distribute trading profits to shareowners each year. Most make the required payout in December. So investors need to find out if they’re about to fall into the year-end tax trap we just described.

Note: Unless the mutual fund is in an IRA, 401(k) or some other tax-sheltered vehicle, capital gains distributions are taxable — even if you reinvest the money in additional fund shares.


Capital gains distributions are no benefit to those who invest in a fund shortly before the capital gains payout. Why? The fund’s share price, or "net asset value," automatically drops by the amount of the distribution. Further, you end up losing money because you'll have to pay tax on the distribution.

Example: Harry buys shares in a fund at a price of $10 per share right before a capital gains distribution of $1 a share. The $1 payout won't help Harry because the net asset value will automatically drop by $1 right after the distribution — since the $1 in capital gains will no longer be in the fund. After the distribution, Harry’s $10 investment will still be worth $10 (the $9 net asset value plus the $1 distribution check). But Harry will have to pay tax on the $1 distribution. If Harry had waited until after the distribution to invest, he would have been able to buy the shares for $9 each and avoid the tax.

Thus, if a fund is going to make a sizable payout, consider waiting until after the distribution to make your investment.

If you have a problem with merchandise or services that you charged to a credit card, and you have made a good faith effort to work out the problem with the seller, you have the right to withhold from the card issuer payment for the merchandise or services. You can withhold payment up to the amount of credit outstanding for the purchase, plus any finance or related charges. If the card you used is a bank card, a travel and entertainment card, or another card not issued by the seller of the defective merchandise, you can withhold payment only if the purchase exceeded $50 and occurred in your home state or within 100 miles of your billing address.

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Why you should not do your own estate planning

Many people wonder about "do-it-yourself" will software or forms: Is it safe to rely on these? The answer is No. First, there are so many things that can go wrong in the drafting, execution, and proving of a will, that it is best to use an attorney. Second, especially in light of recent changes in the estate tax laws, the complexities of estate and inheritance taxes make expert help essential. Finally, if your estate is large or complex enough to require the use of trusts, then you need professional help to draft the trust papers. Note, however, that it is important that you stay actively involved and well-informed throughout the process.

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How much life insurance should you buy?

The ideal amount of life insurance is the amount that will, when invested, generate enough income to allow your survivors to maintain the level of income they are used to. There is an old rule-of-thumb that says your life insurance face amount should equal five times your yearly salary. Although the "five-times-salary" rule will accomplish your planning goals in some cases, there is no substitute for making the calculations needed to find out how much life insurance you need to accomplish your goals. The amount you need depends on how many people there are in your family, whether there are other sources of income besides your salary, how old your children are, and other factors.

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