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Dealing with Debt Collectors

credit cardsTips and tricks to dispute the accuracy of the items of the credit report with the debt collecting agencies.

You must be aware of the fact that your credit score may drop with erroneous entries on the credit report. You can dispute with the creditors or debt collectors if you find any inaccurate negative information on the credit report. Well, you need to know that inaccurate and positive information on your credit report can’t be removed from it. So, if you’ve erroneous entries on your credit report, you can manage to dispute the erroneous items with the debt collectors directly. If you’re unaware of the tricks to dispute erroneous entries on the credit report then you need to correspond with the debt collector to remove the incorrect entries.

Here are some of the important points that you need to consider when you plan to dispute the inaccurate information from the credit report:

1. Know your rights: Make sure you’re aware of your rights to remove the erroneous entries from your credit report with the debt collectors who reported the information. So, you need to send a dispute letter to the company that provided the information to the consumer reporting agency.

2. Debt collectors job to investigate: The debt collectors report the agencies in regards to credit information immediately. Make sure the time frame of response is same when you send a dispute letter to a consumer reporting agency. In most of the cases, the company has 30 days for investigation and the this period may get extended up to 45 days if you provide additional information. Make sure you get information in regards to the credit information within five business days of completion.

3. The debt collectors may not respond to your letter: Well, the debt collectors may not respond to your letter if you contact the credit reporting agencies to dispute erroneous information on the credit report. If the debt collectors have already responded to the dispute, then it may not respond to your letters any more unless you provide more information.

4. Liability of the debt collectors: According to the Fair Credit Reporting Act, if the debt collector provides information to the CRA, he has to follow certain liabilities.
• Finds out more about dispute reported information.

• Provides accurate and complete information if the reported information is incorrect.

• Informs the credit reporting agency if the consumer disputes information.

• Checks when the accounts are “closed by the consumers”

• Sends the credit report agency with the required details like the month and years of the delinquent accounts given to the collection agency or charged off.

• Needs to complete the investigation of a consumer dispute within 30 to 45 days time span, so that credit report agency can manage to complete the scrutiny.

Therefore, you’re required to keep the above mentioned points in mind when your plan to dispute the accuracy of the items on the credit report with the debt collectors.

***This article was contributed by Anjelica Cullin.

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Should I Refinance My Mortgage?

Mortgage interest rates are at historically low rates.  Consequently, you may be wondering if it makes sense to refinance your mortgage.  Although there may be a variety of reasons for refinancing your mortgage, there are probably three primary reasons for you to refinance your mortgage.

  1. Lower your payments by borrowing money at a lower interest rate
  2. Convert your adjustable rate mortgage to a fixed rate
  3. Access some of the equity in your home (this isn’t as common or easy as it was a few years ago)

Since there are costs associated with refinancing a mortgage, the decision to refinance may not be a slam-dunk.  Essentially, you are paying money today, to save more money later.  As an example, assume that refinancing reduces your monthly payments by $50 per month.  If you have 25 years remaining on your mortgage, you will save $15,000 over the life to the loan.  If you assume you will pay $5,000 in closing costs to refinance, you save $10,000… over the next 25 years.

There are many different mortgage calculators available which will help you calculate your savings.  You can click here for one, or search the internet.  Keep in mind, internet calculators are only estimates, and the computations from your lender may be different.

Here are a few additional things to consider in your decision to refinance.

  • The time value of money – In my simple example above, you save $15,000 over the next 25 years, but you have to pay $5,000 up front.  Not only does it take you over 8 years to recoup your $5,000, you also lost the opportunity to invest that money and earn a rate of return (hopefully).  With interest rates on liquid assets near zero, the time value consideration may be nil.
  • Income taxes – The only refinance costs you can deduct are points paid to reduce the interest rate.  Unlike points you pay when you initially purchase your home, points paid on a refinanced mortgage must be amortized over the life of the loan (25 years in our example).  With a lower interest rate, your current mortgage interest deduction will also decrease, which could cause your current tax liability to increase slightly.  Although you’ll come out ahead by paying less interest over the life of the loan, your total benefit might be reduced by a smaller mortgage interest deduction.
  • Length of ownership – Since it’s likely to take you a couple of years of reduced payments to recoup the closing costs, you need to consider how long you plan to stay in your home.  If you expect to move in the next few years, the monthly savings may not be sufficient recoup your out-of-pocket costs for the refinance.
  • The loan process – The mortgage financing industry has changed dramatically.  It’s not easy for anyone to get a mortgage in today’s market.  I’ve had clients who experienced difficulties and delays in getting their refinancing approved, even though they could have easily written a check to pay off their existing mortgage.  The aggravation may be worth it, but expect the approval to be a hassle.
  • Market value – The fair market value of your home may be one of the biggest stumbling blocks to a refinance.  Market value is what prevented many people with subprime and adjustable rate mortgages from being able to refinance.  If you don’t have sufficient equity in your home, you won’t be able to refinance, even if you’re making your current payments, and the refinance will make it easier for you to continue making your payments.

Many advisors will tell you that the interest rate should at least 0.75-1.00% lower than your current rate for a refinance to be economically feasible, but depending upon your situation and long-term goals, a smaller rate differential might still be beneficial.

My advice is to run the calculation with an online calculator and see if it makes sense to you.  If the closing costs can be recouped within the next 5-7 years, and you don’t plan to sell before then, talk to a mortgage broker and get their advice.  A reputable broker will be able to give you a more accurate estimate of what it’s going to cost, the savings you can expect, and the process involved.

Refinancing your mortgage can save you money.  However, there are costs involved, and you want to make sure the benefits exceed the cost.

Can credit card debt management help you to save dollars?

People in this part of the world are used to using credit cards rather than cash for their day-to-day expenses. The proportion of credit use is far more than their retirement savings. Credit cards have given them immense portability and convenience to make frequent purchases. However, this has given rise to several financial diseases which is affecting the fragile US economy. One of the major setbacks is the accumulation of credit card debt. This makes it imperative for the people to know the ways of credit card debt management to avoid getting into a financially sticky situation.

The ways of credit card management

Here are few methods of reduce credit card debt as well as save dollars:

  1. Transfer your credit card balances – This means transferring all your multiple credit card balances into a zero interest credit card. This may be for a year or so as offered by the credit card company. This creates a great opportunity to clear out all your outstanding bills within the promotional period. In this process, you’ll be paying for the principal balance and not for the interest. However, there is a transfer fee for this procedure which hovers around 3-5% of the balance amount. By this method, you’ll save a lot of money even after paying the transfer fee.
  1. Create a budget: Start developing the habit of spending less. Vow to start living a frugal life. This is because the more you spend on useless things, the less you save. Therefore, to fight back such irresponsible behavior, plan a budget that will be comfortable for you to follow. Keep in mind that this budget should not become a burden for you; instead it should motivate you to spend smartly and save money for the rainy day. Use those savings towards debt repayment and you’ll see a remarkable decrease in the number of outstanding bills.
  1. Lower your interest rates: This is one of the most effective steps in the credit card debt management plan. Be vigilant and do your market research to learn about the recent market offers which various creditors are making. After a getting a thorough knowledge of the market offers, contact your current creditors. Request them to lower your card’s interest rate. The creditors will welcome this sort of gesture from you and will readily oblige. If you’ve been a good customer who has been punctual in making the payments, then the creditors will surely consider your request.

During the negotiation phase with your creditors, tell them that you are considering balance transfer as an alternative to lowering the interest rate. This will give them the necessary nudge to accept your terms.

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This article was written by Grace Ruskin.  Grace is a financial writer and is associated with DebtCC Community.

The Buffett Rule

On Monday President Obama unveiled his deficit reduction plan.  In addition to reducing the deficit, he outlined his ideas to pay for the American Jobs Act he proposed two weeks ago.   No surprise his plan includes tax increases on more wealthy Americans.  Phrases such as “shared sacrifice” and people paying “their fair share” make for good sound bites.  However with Washington, the challenge is often deciphering what their pithy sayings mean.

He referenced the “Buffett Rule” as one of his proposals.  It’s named after Billionaire Warren Buffett who has been rather outspoken about the need to raise taxes on the super-wealthy.  Cueing off of a New York Times op-ed piece written by Mr. Buffett a few weeks ago, the Buffett Rule is supposed to make sure people who make over $1 million a year will pay a higher percentage of their income in taxes than someone who makes less than the $1 million threshold.

You may agree or disagree with the concept of the Buffett Rule.  Regardless if you think it’s a good idea, I have three primary issues with the proposed Buffett Rule.

  1. Additional Complexity.  As a tax professional, I can attest that the tax code is exceptionally complex and at times unwieldy.  With the myriad of deductions, exemptions and exceptions, it will be virtually impossible to make sure some making over $1 million will pay taxes at a higher rate than someone making less.  Everyone’s tax situation is unique, so it’s near impossible to offer such a guarantee.  It may sound simple, but it’s going to be very difficult to achieve.
  2. Increased Tax Avoidance.  While it may be good for those of us in the tax business, I can assure you that there will be a host of tax professionals looking for ways to minimize the tax liabilities of their clients under whatever new rules are enacted.  It’s simple economics.  The higher the tax rate, the more cost-effective it is to pay someone to find strategies which minimize your taxes.   You may have your opinions about what’s fair and right, but there is nothing illegal or immoral about structuring your affairs to pay less tax.  Tax evasion is illegal, but tax avoidance is not.  As I recently wrote, if you personally feel like you aren’t paying your fair share, then I would encourage you to make a voluntary contribution to the U.S. Treasury.  Trust me… they’ll take your money.  Political discourse and debate are fine, but it’s wrong to castigate someone who is abiding by the law because you don’t think the result is fair.
  3. Unintended Consequences.  Congress has a lousy track record of using the tax code to target certain persons.  The Law of Unintended Consequences often kicks in, and the negative ramifications are often much more detrimental than anyone anticipated.  Two great examples come to mind; one recent and one from decades ago.  The 1099 reporting provision included in the health care reform is the most recent Congressional bumbling.  As soon as it was passed, it became clear the administrative nightmare would far exceed any benefits obtained.  Fortunately, Congress repealed it before it became effective.  The Alternative Minimum Tax (AMT) is the classic example of unintended consequences.  The AMT was enacted in 1969 to tax 155 wealthy families who were viewed as not paying their fair share.  By 2008, 3.9 million taxpayers were subject to AMT, and 27% of them made less than $200,000. This probably isn’t what the 91st Congress had in mind.

The Buffett Rule may cause some wealthy people to pay more in taxes, but if history is a predictor of the future, the long-term results will be much different than expected.  Such targeted tax policy generally hasn’t yielded the desired results.  I’m not sure why they think the Buffett Rule will be any different.

Do Rich People Pay Taxes?

What do you think… do rich people pay taxes?

Here is a quick answer… Yes!

You may not think that they pay enough, or their fair share, but let me assure you that rich people pay taxes.  Having practiced public accounting for over 20 years and dealing with millionaires and billionaires, I know they pay taxes.  A select few pay more income tax in one year than the average American will make in a lifetime.  When you look at the statistics, it’s actually low-income people who don’t pay income taxes.

Despite the facts, it makes great headlines to claim that rich people don’t pay taxes.  Last week, a CNNMoney article reported that 4,000 millionaires didn’t pay any federal tax in 2010.   The Tax Policy Center was their source of information.  Since I’m always looking to learn and stay abreast of innovative ideas, I read the article hoping to glean something useful.   Not surprising, the details of the article didn’t exactly support the headline.  Here are a few points of contention and contradiction that I noted.

  • Although the article references 2010, it’s unclear how they can make claims about 2010.  The IRS is still processing 2010 returns filed a few weeks ago.  Plus, many high-income taxpayers’ returns are on extension until October 15, 2011.  They don’t cite the source of their statistics, but it certainly isn’t the IRS.
  • The exclusion of municipal interest income from federal income tax was mentioned as a prime example of how millionaires avoid paying taxes.  This is not a tax break for the wealthy.  All interest income from municipal bonds is exempt from federal taxation, irrespective of your wealth or tax bracket.  The contributors failed to mention that this not a tax issue.  It’s a Constitutional issue dealing with the sovereignty of the States.  If Congress could tax municipal interest income, I’m suspect that they would.
  • A capital loss carryover was cited as another possibility.  Capital loss carryovers are generated from the economic loss incurred when you sell something for less than you paid for it.  I don’t think offsetting prior losses with current gains is a great “loophole.”
  • The mortgage interest deduction was another.  This is completely bogus.  You can only deduct interest on $1.1 million of mortgage debt.  Even if you were paying an incredibly high interest rate of 10%, your mortgage interest deduction would be $110,000; far short of being able to shelter $1 million of income each year.
  • Charitable contributions were listed as another possibility.  This is a little better than the mortgage interest deduction, because you can deduct up to 50% of your adjusted gross income to certain qualified charities.  It may get you closer to eliminating your tax liability, but it’s still only 50%.  Furthermore, you have to give the money away. The tax savings might make it more affordable to give, but you’re still out the economic value of what you contributed.
  • Foreign tax credits are also cited.  Generally, you are allowed a credit for taxes paid to another jurisdiction on income that is also taxed in the U.S.  It’s supposed to prevent you from  being taxed twice on the same income.  There are limitations on foreign tax credits which make it extremely difficult to eliminate your U.S. tax liability with foreign tax credits.  Even if it is possible, you’re still paying tax, just not to the U.S.  Furthermore, you would have to pay more to the foreign jurisdiction than the IRS to avoid the imposition of U.S. taxes.

Since tax information is personal and private there no actual examples cited.  These were the possible strategies that the contributors cited.  In reality, this article is a headline searching for a story.  None of the examples given are really “loopholes,” nor do they support the notion that millionaires receive special treatment to avoid paying taxes.

Such articles may seem benign, but I disagree.  Whenever one class of people is able to avoid paying taxes (whether real or perceived), it can provide justification for others to be dishonest in filing their taxes.  Additionally, misinformation can easily lead to tax policy with unintended consequences.  The Alternative Minimum Tax (AMT) is a great example.  The AMT was enacted in 1970 to target 155 high-income families who supposedly paid no federal income tax in 1969, but today, millions of middle-class families are subject to AMT.  A provision originally designed to snare the “rich people” is now being imposed on many middle-class families.

It might make a great headline to suggest that wealthy people don’t pay income taxes, but it’s not really true.  There is no magic to avoid paying taxes.  More often than not, rich people pay income taxes.  If you’re still not convinced, become wealthy and see what you find out.

Tax Tip: Charitable Contributions

Americans are some of the most generous and charitable people in the world.  According to a report by the Giving USA Foundation, Americans gave over $300 billion in 2008.  Your primary motivation for giving to a charity should not be saving taxes, but if you are going to give, you might as well reap whatever tax benefits are available.

Like many areas of tax law, a seemingly simple subject can become complex rather quickly.  There is not enough room to cover all of the rules regarding charitable contributions in this short article, but I’ll hit some of the highlights you should be aware of when it comes to claiming a charitable deduction.

The first requirement is to make sure that the recipient is a qualified charity.  You can give money to any person, group or organization you want, but it may not qualify as a tax deduction.  Click here to search the IRS list of officially recognized charities.  Gifts to individuals are not charitable contributions.  You may want to help someone recover from a natural disaster or medical condition, but your gift isn’t tax deductible.  You can’t circumvent this rule by giving money to a charity that is specifically designated to an individual.

Be advised that there are limitations on the amount of charitable deductions you can claim in any one tax year.  The limitations are 20%, 30% and 50% of your adjusted gross income.  The percentage limitation is determined based upon the property you are giving and the nature of the charity.  Any unused contributions can be carried forward for 5 years.

You can receive a deduction for cash or property donated.  Although your services may be invaluable, they aren’t tax deductible.  One of the biggest issues of donating property is determining the fair market value.  You may be able to get away with your best guesstimate when donating clothes to the Salvation Army or Goodwill, but it gets much more complicated for more valuable items that may not be easily valued.

You can receive a charitable deduction for out-of-pocket expenses you pay on behalf of a charity.  It may be preferable for you to give cash and have the charity reimburse you, but this may not always be feasible.   In any event, you must be able to demonstrate that the expenses were incurred for a charitable purpose and not your personal benefit.  Travel expenses can qualify, but it can’t be a clever way for you to deduct your vacation expenses.

While you may be an honest and trustworthy person, the IRS can require you to substantiate your charitable contributions.  Your word may be good, but it won’t work for cash donations.  You either need to have a receipt from the charity or a copy of a canceled check.  Most public charities will provide you with a statement no matter how much you give, and they are required to provide you with a receipt if you give over $250 in any one gift.  The charity must also indicate if you received any substantial benefits for your gift.  You may give $1,000 to your alma mater, but if you receive sporting event tickets worth $200, you can only deduct $800.

These are just a few of the requirements for deducting charitable contributions.  Consult a tax advisor if you have questions about your particular situation.  Savings taxes will probably not motivate you to make a contribution, but it can make it less expensive or allow you to give more.  Either way, don’t overlook the tax savings that can be derived from a properly documented charitable contribution.

Tax Tip: Credits v. Deductions

Credits and deductions will reduce your tax liability, but credits provide a bigger bang for the buck.  Tax credits provide a dollar-for-dollar reduction in your tax liability, whereas deductions reduce your taxable income.  Thus, the economic benefit of a particular deduction is determined by your tax rate. 

The following is a simple illustration.  In 2010, each individual is granted a $3,650 personal exemption.  A personal exemption can only be claimed by one taxpayer and requires a valid Social Security Number.  Assuming that your marginal tax rate is 25%, you save $912.50 in taxes as a result of your personal exemption. Thus, your tax rate determines your tax savings.  Contrast this with the $400 making work pay credit, which will reduce your tax liability by $400.  Thus, all else being equal, a credit is more valuable than a deduction.

Although credits are more valuable than deductions, you usually don’t have a choice of which benefit you will take.  With few exceptions, the rules define if you get a credit or a deduction.  One exception relates to higher education expenses.  You may choose to take an education credit or a tuition deduction.  Depending upon your situation, you may find the deduction generates a greater benefit.

How can this be?  Well… in the world of tax credits, not all credits are created equal.  There is a distinction between refundable credits and nonrefundable credit.  A refundable credit (e.g., the earned income credit) can actually pay you money, even if you owe (or paid) no taxes.  A nonrefundable credit (e.g., child and dependent care credit) can only reduce your tax liability to a certain threshold (even zero).  Thus, a nonrefundable credit will only refund money that you previously paid, but a refundable credit can actually put dollars in your pocket that you didn’t pay.  You probably aren’t surprised that most credits are nonrefundable.

To make matters worse, many credits are limited to the dreaded alternative minimum tax (AMT).  When utilizing these credits, you can’t reduce your tax liability below the alternative minimum tax (e.g., education credits).  As a result, you may qualify for an education tax credit, but not be able to realize the full benefit of it, because of your AMT liability.

As you can imagine, there are more potential deductions than credits, and more nonrefundable credits than refundable ones.  It may seem rather obvious, but it’s helpful to understand the distinction.  You might be disappointed if you equate a deduction with a nonrefundable credit that is subject to AMT.   It can be confusing, so if you have questions or are unsure, consult a tax professional for further guidance.