Client Newsletter
January 2000

• Here Are The Types Of Tax Records To Keep For The Coming Year
• Cosigning a Loan Can Bring Major Problems
• College Funds Should Be Put In The Parents' Name, Not The Child's
• Dual Safe Deposit Boxes Can Be Advantageous
• When Can You Drop The Private Mortgage Insurance On Your Home?
• How To Avoid The Little-Known Barriers To Getting A Low-Interest Credit Card

Briefs:

• Consider Reviewing Your Medicare Coverage
• Value of Services Is Not Deductible As A Charitable Contribution
• Most People Are Unfamiliar With Just What Probate Is

Financial Strategies is intended to provide generalized information that is appropriate in certain situations.  However, because of the complexities of the applicable laws and regulations and the continuing developments in these areas, the contents of this newsletter should not be acted upon without specific professional guidance.

Now that the tax season is under way, this might be a good time to review the types of tax records that you should keep for the coming year. Bear in mind, however, that these are only general recommendations. Many taxpayers might have a slightly different retention program depending on their particular needs, but the following list -- of income and deduction items for which records should be kept-- is a good place to start:

• Income (wages, investment income, etc.)
• Exemptions (cost of support)
• Medical expenses
• Taxes
• Interest expense
• Charitable contributions
• Child care
• Business expenses
• Professional and union dues
• Uniforms and job supplies
• Education (if deductible for income taxes)
• Automobile (if used for deductible activities, such as business or charity)
• Travel (if you travel for business and the costs are deductible)

Caution: While youâre storing your current yearâs income and expense records, be sure to keep your bank account and loan records too, even though you donât report them on your tax return.  If the IRS believes youâve underreported your taxable income because your lifestyle appears to be more comfortable than your taxable income would allow, having these loan and bank records may help in overcoming that impression.

Many people agree to cosign loans for friends or rela­tives. They do this as a favor, a vote of confidence or because they just can't say no. Unfortunately, they often find that they've bitten off more than they intended to chew.

The cosigner of a loan agrees to be responsible for its repayment along with the borrower. While a lender will generally seek repayment from the debtor first, it can go after the cosigner at any time.

Note: Where a loan is guaranteed (not cosigned), the lender can usually go after the guarantor only after the principal debtor has actually defaulted.

Finance companies report that many cosigners end up paying off the loans they've cosigned÷along with late charges, legal fees and all. Not only is this an unwanted out-of-pocket expense, but it can also be an undeserved blot on the cosigner's credit record.

TIP: It's better to guarantee a loan than to cosign it. However, if you're willing to cosign a loan, at least try to get the lender to agree to refrain from collecting from you until the borrower actually defaults and try to limit your liability to the unpaid principal at the time of default. Then stay on top of the borrower's financial situation to help avoid a default (for example, have the lender notify you whenever a payment is late). At least you can preserve your credit rating by nipping pay­ment problems in the bud.

Related Financial Guide: APPLYING FOR A LOAN: How To Get The Best Loan At The lowest Cost.

There are many factors that should be considered in deciding who should be the owner of funds set aside for your childâs education. We would be glad to help you determine which is right for you.

Caution: Bear in mind that putting an investment or other asset in the childâs name means that he or she will be free to spend it without limitation.

As a general rule, in advising parents about saving for college costs, we recommend that education funds be kept in the parentsâ names, as opposed to the childâs.  However, there are some tax and financial aid considerations that should be taken into account in making this decision.

	Note: In the past, parents would invest in the childâs name in order to shift income to the lower-bracket child. However, the enactment of the so-called ãkiddie taxä largely put an end to that strategy. Now, investment income over $1,400 of children under age 14 is taxed at the parentsâ rate. Once the child reaches age 14, all income is taxed at the childâs own rate.
	TIP: Several income-shifting strategies are still available if you want to invest in your childâs name. For instance, if you invest in equities that pay small dividends but have a high potential for appreciation, the income earned when your child is under 14 will be minimal while the growth in the stock values will occur over the long term.
	TIP: A Section 2503(c) trust might be utilized. This allows a trustee to control the funds until your child reaches age 21.  Or the  Uniform Gifts to Minors Act (UGMA) might be used to establish a custodianship for the child.  However, keep in mind that gifts to children under the UGMA are irrevocable, so your child can use the money for non-educational purposes once he or she reaches the age of majority÷a determining negative factor for many parents.

Another reason for not putting the assets in the childâs name is that the rules for determining financial aid generally decrease the amount of aid for which a child is eligible by 35% of the assets the child owns. (For example, if the child owns $10,000 worth of stock, the amount of aid for which he or she is eligible is reduced by $3,500.) On the other hand, the amount of aid is reduced by only 12% of the assets held by parents.  

Related Financial Guide: YOUR CHILDâS EDUCATION: How To Finance It

One way of avoiding this problem is to have two safe deposit boxes--one in the name of each spouse. The wife can keep in her vault important documents that will be needed in the event of her husband's death and the husband can keep those documents that will be needed if his wife dies.

An extra safe deposit box costs very little. If it can help minimize the problems and grief at time of death, it can be a worthwhile expenditure.

TIP: Many states have eliminated the requirement that a safe deposit box be sealed where the box is in joint names. In these states, the problem can be avoided by putting the box in the names of both spouses.

Generally, if you make a down payment of less than 20% when buying a home, the mortgage lender will require you to buy private mortgage insurance (PMI). You can generally drop this PMI, if you have a good payment record, when you have attained at least a 20% equity in your home by paying down the mortgage or by an increase in the value of your home resulting in your equity climbing past the 20% benchmark. However, some lenders require you to keep the PMI forever while others make you keep it for at least five years.

	TIP: To find out whether you can cancel your PMI, write your mortgage servicing company (the company to which you send your mortgage payments). You may be required to pay for an appraisal.
	TIP: If you are able to cancel the insurance, you will receive any prepaid premiums that are in your escrow account.
	Related Financial Guide: MORTGAGE ALTERNATIVES: How To Choose The Right One.

Promotions are flooding the mails offering low-interest credit cards and urging the recipients to transfer their balances from their high-interest cards. If you decide to apply for the offered card, keep in mind that the issuer may have criteria that could cause your application to be denied ­ for reasons that may have little to do with your creditworthiness.  Here are some tips for minimizing these little-known obstacles:

1. Donât apply for more than two credit cards within a six-month period. Too many applications mean too many inquiries, and probable denial.
2. Don't state your intention to consolidate other loans, unless the card advertises this opportunity. Some banks donât want their cards used for this purpose.
3. If you have high credit balances and are close to your credit limits on your other credit cards, pay them down before you apply. High credit balances, especially those up to their limits, are red flags to low-interest credit card issuers.
4. If you have several revolving accounts, close any you do not absolutely need before you apply. Some issuers total up all credit limits on the credit cards that a consumer holds and consider that total potential liability. Too much potential liability is another common basis for denial.
5. Make sure your debt-to-income ratio is under 35-40%. High debt-to-income ratios are a red flag to low-interest credit card issuers seeking to avoid risks.

Related Financial Guide: CREDIT CARDS: How To Choose And Use Them Wisely

Consider reviewing Your Medicare coverage. Many HMOs dropped out of the Medicare program on January 1, 2000.  Almost 350,000 Medicare beneficiaries will be affected by this pullout (a similar HMO exodus last year affected over 400,000 people). Not only are HMOs dropping out, but many of the remaining HMOs are expected to reduce benefits and make other changes adversely affecting beneficiaries. Therefore, if you enrolled in a Medicare HMO as a substitute for traditional Medicare, this might be a good time to review your options. Also consider purchasing a supplemental insurance policy to cover the gaps in Medicare.