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The Threshold Generation

Jan 26th, 2010
by Karen.
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I didn’t realize that anyone ever bothered to divide boomers into more specific categories, but that’s just what a May 2009 survey, “Different Age Groups, Different Recessions,” from the Pew Research Center has done. The survey, which asked adults about the impact of the recession on their finances and lifestyles, refers to boomers between 50 and 64 as the Threshold Generation. That is, they should be at the peak of their earning power, as well as nearing retirement.

Of course, that was before the recession. Judging from the survey results, it won’t be surprising if a lot of boomers end up working for longer than they had planned. As for retiring early – good luck.

A big reason for this shift is, not surprisingly, the dives the stock market took over the past few years, (although it’s since come back some). Researchers Rich Morin and Paul Taylor asked respondents whether they had lost money on their investments in the previous year. More than sixty percent of 50- to 64-year olds had lost money; 14 percent had seen their holdings drop by more than 40 percent. In fact, this age group took larger hits than any other age group in the survey. No wonder three quarters said the recession will make it harder to meet their retirement needs.

Of course, we boomers brought some of this on ourselves. Many older Americans have some memory of the Depression, and learned what it meant to get by with less. Boomers…not so much. We got used to buying just about anything we wanted, when we wanted. (Although, it seems at least some of us got the memo that this couldn’t go on forever. Again, according to the Pew survey, 59 percent of the Threshold Generation cut back on spending in 2009.)

At the same time, boomers have gotten caught in some larger forces. Many of our parents could count on pensions to cover a chunk of their expenses in retirement. But, between 1980 and 2004, the number of pensions in the U.S. has dropped from 148,000 to 47,000, according to the Employee Benefits Research Institute. Instead, it’s up to us to save for retirement. Most of us also are picking up more of the tab for our health care costs.

The upshot? It’s likely that more of us will be working into our late 60s and even early 70s. In fact, it’s already happening. In March, 2009, one-third of 65- to 69-year old men were employed, compared with 26 percent in 1990. Among women the same age, one quarter were working in 2009, versus 17 percent in 1990. That’s according to a 2009 report by Congressional Research Services, “Older Workers: Employment and Retirement Trends.”

Still, there are few bright spots: For instance, about one-third of adults said the recession brought their families closer, the Pew Researchers found. About a quarter made plans to plant a vegetable garden.

How about you? Are your retirement plans still on track?

Posted in: Lifestyle, Retirement planning.

Speculating on a Speculation Tax

Jan 21st, 2010
by Karen.
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Recently, I’ve noticed more buzz about a potential tax on trades involving stocks, bonds and other financial instruments – AKA, the speculation tax. From the stories I’ve seen, such as this one by Dean Baker, co-director of the Center for Economic and Policy Research, such a tax would run about .25 percent on a transaction. That works out to about $2.50 on a $1,000 trade.

Like most people, I’m not particularly thrilled with taxes. However, this tax seems less onerous than others that we currently pay, for several reasons.

First, it’s progressive, and would hit wealthier people more than middle-class working stiffs. That seems fair, given that the wealthiest 10 percent of households in the U.S. hold about 80 percent of stocks and mutual funds, according to “Who Rules America,” a paper by William Domhoff, a professor of sociology at the University of California at Santa Cruz. And, the amounts on the level of investments most middle-class people make – again, about $2.50 on a $1,000 trade – are not going to force anyone to have to delay retirement or skip college.

In addition, even a small tax on transactions should help to moderate the speculation that currently occurs in the financial markets. Say a trader purchases masses of a security in the morning, and then sells it later that day. If the volume is large enough, the trader can make a profit on even a minute fluctuation in the price. The problem with speculating is that when it’s carried out in large quantities, it can lead to asset bubbles, notes Anniki Lane with Citizen Works. The prices of assets go up not because the assets themselves are inherently more valuable, but because investors’ activity pushes the prices higher. One prime example: the recent housing bubble. Moreover, speculation does little to help the non-financial sectors of the economy. It doesn’t, for instance, result in financing for a new manufacturing plant or a promising tech start-up.

Enforcing such a tax would be relatively straightforward. After all, financial transactions already are reported to the IRS, Lane notes.

And, while some opponents say that a tax on financial transactions would drive financial business outside the U.S., that doesn’t seem to have been the case for those countries that have implemented such a tax, such as the U.K. What’s more, the U.S. has had such a tax in the past, during the Civil War, the Spanish-American War and again starting in 1914, according to this paper from TaxAnalysts. In fact, the 1914 tax remained on the books until the 1960s.

Finally, while the hit to any individual from a speculation tax would probably go unnoticed, the tax could raise substantial dollars – more than $170 billion annually, according to this paper by the Center for Economic and Policy Research. And, that’s assuming that trading fell 50 percent due to the slightly higher trading costs.

To be sure, the proper level and type of taxation is always fair game for debate. But a speculation tax seems like a more equitable, straightforward choice than many others.

Posted in: Tax Laws.

Playing the Market

Jan 14th, 2010
by Karen.
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If I ever had any doubt that trying to outsmart the stock market was futile, a couple of statistics that I recently came across have confirmed my thinking.

One was an article in the Wall Street Journal that analyzed the performance of the most highly recommended stocks of ten years ago. AOL, Cisco Systems, Lucent, Qualcomm, MCI, Worldcom, and Texas Instruments all topped analysts’ lists in 1999. Had you taken their recommendations and sunk $1,000 into each of these stocks, you’d now be looking at $1,745. Granted, this decade ended as a lousy one for the stock market, but even so…

Conversely, the real winners of the decade were several companies that hardly are household names: Southwestern Energy, XTO Energy, Range Resources, and Precision Castparts. Just $1,000 wagered on each of these ventures in 1999 would be worth nearly $132,000 today.

Just the names of the companies show how the focus of investors – and pretty much the entire country – has changed. The tech companies dominated stockpickers’ lists in the late 1990s and into 2000 and 2001. Then, the Internet bubble burst, and the stocks came crashing down to earth. Today, energy is top of mind for investors, as well as consumers and politicians.

Globalization also is playing a role in the performance of different stocks. Had you invested $100 in the S&P in 1999, you’d now have $91, according to this recent article in Newsweek, which draws from a Merrill Lynch report. Had you gone further afield and put your C-note in emerging market stocks, you’d now have $262. Somewhat surprisingly, the South American nation of Columbia was the best performer, generating an eye-popping return of 1,529 percent. Conversely, while China is the focus of much attention, it rose by a relatively modest 150 percent.

A decade from now, it’s hard to know which countries, business sectors and companies will be capturing headlines and investor sentiment – and backing that up with solid performance. Analysts can do all kinds of projections, but too many variables are unknown or hard to capture.

Given that no one has a crystal ball that works with any accuracy, it doesn’t make much sense to pay anyone big bucks for their supposed expertise. Instead, you’re best off focusing on fund expenses, and keeping those as low as possible. True, this isn’t as glamorous as seeking out the latest high-flying fund, but it the impact on your bank account is significant. Consider these numbers, which I calculated using a fund analyzer on the FINRA website: I invested $10,000 in two funds, each returning an estimated 5 percent annually. However, one has an annual operating expense ratio of .09 percent, while the other’s annual operating expenses run 3.23 percent. The difference in the funds’ values after ten years is staggering: the first is worth $16,143, while the second would return $11,793. No fund manager is going to be able to close that gap, no matter how knowledgeable and insightful.

Posted in: Financial Basics, Investment Portfolio.

Women and Retirement: The Triple Whammy

Jan 6th, 2010
by Karen.
2 comments

When it comes to saving for retirement, women face a triple whammy. For starters, women, on average, live three years longer than men. In fact, most women can expect to be retired for 22 years, versus 19 years for men, according to this report from Hewitt Associates.

Once they’re retired, women tend to face higher healthcare costs. Consider these figures: the average 65-year old man in 2009 will need between $134,000 and $378,000 in order to be 90 percent sure he can cover all his health insurance and medical costs in retirement. The same figures for women are $164,000 to $450,000, the Employee Benefits Research Institute reports.

That’s not all. Women tend to earn less than men. Their average salary comes in at around $57,000, versus $84,000 for men, again according to the Hewitt report. That’s because women are more likely to take time off to start families just as their male counterparts are rising up the corporate ladder. Women’s lower average salaries hurt their ability save for retirement, since the calculations behind many corporate retirement plans, as well as Social Security, are based on earnings levels.

The upshot? Most women start retirement with fewer dollars saved, and have to make them go even further. In fact, women’s median income in retirement is just over half – 58 percent – of men’s income, reports The Hartford and the MIT AgeLab. No wonder nearly two-thirds of women are concerned that they’ll outlive their retirement savings!

While these figures are sobering, to say the least, they’re not a reason to throw up your hands and do nothing. Instead, they should be a call to action. A couple steps you can take:

- Get comfortable with saving and investing. If you’ve put off saving for retirement because you feel you don’t know enough, now’s the time to start learning. If you’re married, you don’t want to leave this all to your spouse; having a Y chromosome doesn’t mean one is more gifted at saving and investing. If you’re single, you really need to take this on while you still have time to prepare.

Any of the many website (including this blog!) and publications on the topic, such as Money or Kiplinger’s Personal Finance are great resources. One book that can help is “Saving for Retirement without Living Like a Pauper or Winning the Lottery” by Gail MarksJarvis.

- If you work outside the home and your employer offers a retirement plan, use it! Start now, even if it’s just $25 $50 a month. Then, increase your contribution on a regular basis. If you get a raise, for instance, bump up your contribution. If you get a bonus or come into a chunk of cash, stash some of it in your retirement account. You also want to understand how the plan works. For example, if you have to work for five years before you’re vested (that means you are eligible for benefits from the company pension plan), you want to think long and hard about quitting after four years and seven months on the job.

- Pay yourself first. You’re not doing your kids any favors by showering them with the latest toys and accessories, if it means you can’t save for your own retirement. That’s true for paying for college, as well. Your kids can look into financial aide, take out student loans (prudently), or work and earn money for school. You can’t take out a loan to fund your retirement. What’s more, no matter how much your kids love you, they probably don’t want to be forced to take you in if you can’t afford your own place in retirement.

- Keep tabs on your Social Security earnings. If you currently work, or have worked, you’ve built up Social Security credits. You also may have credits if your spouse works. For many women, Social Security is a major chunk of their retirement income. To check this out, head to the Social Security website: http://www.socialsecurity.gov/

- Work longer. If you can stay in the workforce a few years longer than you may have planned, you benefit if two ways, First, you’re earning more income, which means you can save more. On top of that, while you’re earning an income, you should be able to postpone dipping into your retirement account.

While preparing for retirement may not be the most enjoyable task on your To-Do list, it is one of the most important. What’s more, there’s no reason to be intimidated by it. Start with small steps and keep at it. You’ll have a much better chance of having a retirement you can enjoy, versus one spent worrying about money.

Posted in: Financial Basics, Retirement planning, Women and finances.

ETFs Explained

Dec 23rd, 2009
by Karen.
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As I noted in a post from November, my husband and I are debating whether to go with a new financial planner. One that we recently contacted indicated in his marketing materials that he uses ETFs, or exchange-traded funds, with his clients. While I’ve heard of ETFs, I wasn’t exactly sure just how they worked, or if they would be a good investment choice for us.

So, I did some research. Here’s what I found out: ETFs are securities that track an index, a commodity or a basket of assets, much like an index fund, according to Investopedia. Similarly, ETFs offer the ability to diversify your investments. Unlike an index fund, however, ETFs trade throughout the day on an exchange.

In addition, with ETFs, you can buy on margin or sell short. Buying on margin means that you make only a down payment for the purchase, and then use the securities themselves as collateral for the unpaid amount. Short selling is a way to (hopefully) profit on what you think will be a drop in the price of a security. You do this by borrowing the securities, then turning around and sell them, with the idea of buying them back later, at the (expected) lower cost. Then, you can pocket the difference between what you earned on the sale and what you had to pay to buy back the securities. In any case, both are risky strategies, and not something that I plan to do with the money we’re saving for retirement.

However, I was more interested in the claim made by some that ETFs usually have lower expense ratios than mutual funds. The average expense ratio for an index mutual fund is 1.06 percent, versus .4 percent for ETFs, according to “A Comparison of Mutual Funds and Exchange Traded Funds,” by Jason Johnson, associate professor with Texas A&M.

In part, the difference is due to the lower cost structure of ETFs. Because transactions occur directly between investors, without a fund company sitting in the middle, ETFs don’t have to employ armies of call center employees and account managers, Morningstar notes.

However, this claim isn’t as absolute as it first appears, as the fees for some index funds are competitive with ETFs. For instance, fees charged by the 650-some ETFs funds listed by Morningstar in 2008 ranged from .07 to 1.25 percent. The lowest mutual funds came in at .05, although the most expensive charged an obscene 10-plus percent, Investopedia reports.

In addition, most ETF investors pay brokerage commissions when they buy or sell their holdings. While we would be buy-and-hold investors, these fees would add up, given that we’d be purchasing on a regular basis – probably monthly.

On the other hand, Professor Johnson identifies several other advantages of ETFs that merit our consideration. One is an enhanced ability to keep tabs on the allocation of assets. That’s because ETFs trade on one of the three major exhanges. So, we could have a group of ETFs – say, several each or different types of stocks and bonds – and see all of them in one shot. Unless we were to buy mutual funds that are all from the same company, it gets difficult to get a single view of our mutual fund holdings. And, ETFs have a slight edge in transparency, since their holding are updated daily. In contrast, mutual funds are required to state their holdings only twice a year, although some do it more frequently.

In the end, I think we’ll stick with no- or low-load index funds for our ongoing retirement savings; the commissions we’d pay to invest regularly in ETFs would outstrip any reduction in fund expenses. However, if we, for some reason, come into a lump sum that we’d like to invest, we give more consideration to an ETF.

How about you? Do you prefer mutual funds or ETFs? Or, do you invest in both, depending on the type of investment you’re making?

Posted in: Investment Portfolio, Retirement planning.

Financial Decisions After 50: Is It All Downhill?

Dec 17th, 2009
by Karen.
1 comment

I recently came across a study that was, frankly, rather depressing for anyone over the age of about 20. According to the researchers behind the study, “The Age of Reason: Financial Decisions over the Life-Cycle with Implications for Regulation,” one’s financial decision making abilities peak at age 53. After that, your financial smarts take a dive.

In reaching this conclusion, the researchers studied 10 common financial transactions, including the use of balance transfers for credit cards, home equity loans and lines of credit, auto loans, credit card interest rates and late payment fees, along with a few others. They separated the transactions by the ages of the people involved.

Here’s what they found with credit card balance transfers. If you’ve ever moved your balance from one card to another, you know the usual drill: you get a low teaser rate for a couple of months, but only for the balance you transfer; any new purchases get socked with a higher rate. What’s more, your payments first are allocated to your transferred balance, which is at the lower rate.

So, if you’re really smart, you don’t make any purchases on the new card. Instead, you use it just to pay down your balance, and put any new charges on your old card. Some people recognize this from the get-go; others don’t figure it out until they’ve been dinged by high interest rate fees for a couple of months. And, some just never make the connection.

When sorting the study participants by age, the researchers found that those most likely to, as they say, “experience a Eureka moment,” and forego using the new card for new purchases were between the ages of about 29 and 50.

The researchers also found that 50-somethings paid the lowest interest rates on home equity loans and lines of credit. Rates started creeping up once borrowers hit about age 53. However, it’s worth noting that 20-somethings also paid higher rates. This result illustrates what the study authors note elsewhere: “Experience rises with age, but analytical abilities decline with it.”

The researchers offer a couple of reasons for what appears to be a decline in financial decision-making as you start racking up the decades. First, there’s what’s known as “analytic cognitive function.” This refers to your memory, reasoning, spatial visualization and the speed at which you process information. Data from other research has shown that this declines at about one percent a year after age 20. At 49, I’ve already lost…quite a bit. I suppose I could calculate the drop (maybe with some help from my 12-year old, who’s currently studying rates of decay) but why bother?

On top of that, the authors cheerily note that “the prevalence of dementia doubles with every five additional years of lifecycle age,” hitting about 30 percent of adults over 85. Even if you manage to escape that, another 30 percent of 80-somethings suffer from “cognitive impairment without dementia.” According to the Annals of Internal Medicine, this can affect attention, language, judgment, memory, reading, or writing, but doesn’t severely impair daily living. Well, that’s better than full-blown dementia, of course, but still nothing to look forward to.

If there is a bright spot in the research perhaps it’s this: the study notes that the evidence isn’t conclusive. For instance, older people overall tend to borrow less than younger people. So, it’s possible that the older borrowers in the study aren’t an accurate representation of the entire population of older adults.

In addition, I like to think – fully recognizing that I’m engaging in some rationalizing here – that I can delay or minimize the expected decline in brain activity by staying engaged and active (note to self: renew that subscription to The Economist). Also, I hope that if I make it to my 80s, the experience I’ve gained over a lifetime of making financial decisions – both the smarter ones, and a couple of stupid ones – will compensate for a few slowing brain synapses.

Posted in: Financial Basics.

Longevity and Money

Dec 11th, 2009
by Karen.
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I just calculated my life expectancy at www.livingto100.com, and found that I should live to 99. A few months ago, my doctor also told me I’ll likely live into my 90s. She based her assessment on my grandparents’ longevity, which I had indicated on the multi-page medical history form that most doctors have you fill out now. In any case, two of my grandparents lived into their nineties, and one into her eighties. That means the odds are pretty good that I’ll be around a while, as well.

Apparently, I’m not the only one who has a good chance of living a long time. According to a recent study in the UK-based medical journal The Lancet, most babies born in developed countries after the year 2000 can expect to eventually see 100 candles on their birthday cakes. A summary of the study is available here.

Of course, no one really knows how long anyone will live. However, I’ve begun thinking about what it might be like to have another 50 years to bug my kids, hang out with my husband, and enjoy peanut butter fudge ice cream. And, while it may sound crass, figuring out the financial implications of living through nine or ten decades is important as well. After all, I’d like to be able to have some choices about where and how I live as I get older. That’s probably going to require money.

So, I’m thinking I’ll need to take a couple steps:

a) Work longer. Assuming I’m in good health, retiring at 65 just doesn’t seem prudent, or even like much fun. For starters, I’ll probably need the money. The longer I can hold off on claiming Social Security (assuming it’s around), the better. For each year I wait, my benefits will grow by about 8 percent, as this chart shows. What’s more, while I’ll probably reduce my schedule as I get older, I don’t need 30-some years just to hang out. I like the intellectual stimulation and socializing (even for a freelance writer camped out in a home office) that working provides.

b) Save for retirement: OK, my husband and I already doing this. However, the more I think about out possible life expectancies, the more it hits me just how critical our actions are. We really can’t just spend now and assume the money will somehow fall into place later on; we’ve got to act with the long haul in mind.

c) Stay more or less in shape. I’m already seeing how my health is becoming more of an issue as I get older; injuries take longer to heal, and it’s tougher to get by on just a few hours of sleep. I’m guessing that’s only going to accelerate. For both my physical health and our pocketbook, I’d like to keep medical issues and expenses to a minimum. I realize that plenty is outside my control. However, I can keep an eye on my diet (and my husband’s for that matter) and stay active. Fortunately, I usually look forward working out, so that’s not too much of an issue. As for my diet – well, it’s not bad, but I could cut back on the treats.

d) Keep tabs on what’s going on in Washington. OK, staying informed is our responsibility as citizens. At the same time, much of the legislation that’s passed has an impact on our pocketbooks in one way or another. Given all that’s going on in the economy, changes to retirement plan and health care regulations, as well as Medicare and Social Security and taxes are likely. I’d like to have some idea of the impact of possible changes on both my finances and the overall health of the economy.

How about you? Any thoughts on your own longevity and how it might impact your finances?

Posted in: Financial Basics, Retirement planning, Tax Laws.

Making Sure Your Bank Accounts Are Safe

Dec 2nd, 2009
by Karen.
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So far this year, 124 U.S. banks have failed. That’s according to the FDIC’s appropriately named Failed Bank List. This total compares with 26 in 2008, two in 2007, and zilch in both 2005 and 2006.

So, what happens to your money if it’s in a bank that fails? For starters, as long as your (or your family’s) accounts at any FDIC-insured bank total less than $250,000, your money is covered by FDIC insurance. (While the total amount that could be covered at any one bank used to be $100,000, the limit was raised to $250,000. That limit is currently good through 2013, the FDIC says.) And, in some cases, you could have more than $250,000 at a bank and still be covered. (More on that later.)

That raises another question – how do you know if your bank is covered by FDIC insurance? Again, you can use the web. Head to FDIC Bank Find, and type in the name of your bank. You can check that your bank is insured, get a list of its office locations, and find out a lot more about it than you probably want to know.

OK, once you’ve figured out if your bank comes under FDIC coverage, how can you verify whether your own accounts are protected? Now, it’s time to use what the FDIC calls EDIE, which is short for Electronic Deposit Insurance Estimator. This is useful if you have several accounts at one bank, and the total is over the $250,000 FDIC insurance limit. Depending on the ownership structure of each account, the entire sum may be protected. For instance, in one of the examples on the EDIE website, one spouse has a money market account in his name, the other spouse has a CD in her name, and they co-own an account that is payable-on-death to their daughter. The total amount in the bank is well over $250,000, but it’s all covered by FDIC insurance.

Of course, if your bank does fail, you’re probably going to want to make sure you have access to your hard-earned money, whether it’s insured or not. The FDIC says its goal is to make deposit insurance payments within two days of a bank failure; by law, the agency is required to make payments as soon as possible. Payouts on more complicated accounts, such as those linked to trusts, could take longer than a couple of days, however.

Interest on your accounts will stop accruing once it closes. However, if another bank takes over a failed bank, it would re-set interest rates and begin accruing interest again.

If you still have questions about a failed bank – say, you want to identify and contact the bank that acquired it – you can head to the also appropriately named Failed Financial Institution Contact Search from the FDIC. Plug in the name of the bank and you can find, among other information, the name, phone number and website address for the acquiring bank, as well as the last date to file a claim against the bank.

So far, I’ve been fortunate when it comes to my banks (knock on wood). None have failed, so I haven’t had to make use of any of these tools. However, it’s good to know that they’re available. How about you? Have you used a bank that has gone under? How easy was it to make sure that your money was safe and sound?

Posted in: Financial Basics.

Something To Be Thankful For: Smarter Spenders

Nov 25th, 2009
by Karen.
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The recession, as painful as it is for those who’ve lost jobs and are struggling, may have a silver lining. That’s this: a fair number of consumers are consuming less and saving more, according to several holiday surveys completed over the past few months.

A sampling of results:

- Nearly four out of five (78.6 percent) of respondents to the American Pulse survey by BIGresearch said that they are spending less. What’s more, 61.5 percent are paying off debt and 34 percent are saving the money they’re not spending. The figures are from the October 2009 survey.

- When it comes to holiday gifts, nearly one-quarter (24.9 percent) of those participating in the NRF’s 2009 Holiday Consumer Intentions and Action Survey, also conducted by BIGresearch, will pay with cash. That’s up about nine percent from 2008. What’s more, about 42 percent will pay with check or debit cards, up slightly (2.5 percent) from 2008. That leaves 28 percent who are likely to rely on plastic, down from 32 percent. About four percent will use personal checks.

- Once consumers get to the malls, whether virtual or real, they’ll be on the hunt for bargains. Nearly nine out of ten respondents to the Accenture Holiday Shopping Survey won’t part with their cash unless they can find a discount of at least 20 percent. In fact, one-third of respondents plan to buy mostly or all discounted items. What’s more, 63 percent are setting a holiday budget, up from 54 percent in 2008.

- Respondents to another survey, the annual study of consumers’ holiday spending intentions by NPD Group, are similarly focused on deals and discounts. Forty-five percent said they will comparison shop — a five-year high, NPD Group reports. In addition, 62 percent said they will look at overall value for the price when deciding where to shop. That tops the 50 percent who said they’re looking for convenient locations, and the 45 percent who are focused on product quality.

- Not surprisingly, 84 percent plan to spend less on gifts than they did last year. That’s according to an October poll of 1,000 adults by Context-Based Research Group and Carton Donofrio Partners. Of those, 43 percent say they strongly agree with the statement that they will spend less. Equally important, about one-third of respondents said they plan to volunteer this holiday season, while more than three-fourths will spend more time with friends and family.

Hopefully, this focus on smarter spending will be sustained. That would be something to be really thankful for.

Happy Turkey Day!

Posted in: Financial Basics, Spending.

Get ‘Em While They’re Here: Expiring Tax Cuts

Nov 19th, 2009
by Karen.
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The ways things are going now, your tax bill for 2009 probably will look a whole lot better than the bill for 2010. What’s more, that bill is likely to be easier to swallow than the one ahead for 2011. That’s because 73 tax provisions expire in 2009, and another 40 in 2010, according to this report from the Joint Committee on Taxation.

To be sure, a good chunk of the provisions set to wither away will impact corporate America, rather than individuals and families. And, it’s always possible that some may be extended. Even so, it makes sense to have an idea of how the potential changes may impact your pocketbook.

These are scheduled to end in 2009:

1) Unemployment compensation: It may be small consolation, but if you were downsized this year, you get to exclude from your gross income the first $2,400 you received in unemployment compensation. If you’re married, and both you and your spouse lost your jobs, you each get to exclude $2,400. Here’s more from the IRS.

2) Deduction for state sales and excise taxes on car purchases: Need some new wheels? You have an added incentive to get them soon. Purchase a new (used won’t do) car or light truck between February 17 and December 31, 2009, and Uncle Sam will let you deduct any state and local excise and sales taxes you have to pay. You don’t want to go too wild, however, since the deduction is limited to the fees and taxes paid on purchases up to $49,500. And, this deduction is reduced if your income tops $125,000 (single filers) and $250,000 (married filing jointly). For more, check out the IRS website.

3) Deduction for qualified education expenses: If you’ve got a kid in college, or have headed back to school yourself, the tax code currently lets reduce your taxable income by the amount of tuition and fees you’ve paid, up to $4,000. Only certain expenses qualify, and the deduction can’t be used for room and board or transportation. Another note: it begins to phase out once your income hits $65,000 for single filers and $130,000 if you’re married and filing jointly.

Now, here’s a few that are slated to be gone after 2010:

1) Tax credit for energy efficiency: If you’re a homeowner and you’ve been meaning to go green, you might want to get on it. Between now and the end of 2010, you can get a tax credit of 30 percent of the cost of windows, doors, insulation, roofs, water heaters and a few other items, providing they meet certain energy efficiency standards. The credit is capped at $1,500 total over the two years – not $1,500 per year or product. And, you need to buy and begin using the gear some time between January 1, 2009 and December 31, 2010. More info is available at Energy Star.

2. The tax rate on dividends: For 2009 and 2010, the tax rate on qualified dividends (generally, those paid by domestic companies and which you’ve had for at least 60 days during a specified period) tops off at 15 percent. Unless it’s extended, the rate is scheduled to head up after 2010, as this report from Wipfli, a CPA firm, discusses.

3. The child tax credit. It’s not your imagination – your kids are costing you more. As it stands now, the $1,000 tax credit per child will drop to $500 after 2010, as the Tax Policy Center notes. (The credit declines by five percent if your adjusted gross income tops $110,000 for married filing jointly, and $75,000 for single parent filers.)

Having seen the list of all the tax benefits that could expire — some of which I wasn’t aware of in the first place — I’m going to be more diligent about making sure that we’re taking advantage of all that we can, while they’re here.

How about you? If these provisions aren’t extended, how will that impact your tax bills?

Copyright 2009 Karen M. Kroll

Posted in: Tax Laws.

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