So I read this article after it was highlighted on Business Week’s Well Spent by Amey Stone and I was amazed to find the majority of credit card holders first find out about a credit card via direct mail. Vertis did the survey in Jan 05 and discovered that what came in second at a piddly 11% was “Informed by someone in a store.” (which explains why they peddle store cards so strongly).

Read the article quickly because after Mar 2, 2005, it’ll only be available to paid members of EMarketer.com. The statistical breakdown is as follows:
Direct Mail – 53%
Informed by Someone in a Store – 11%
Bank – 8%
Friend/Relative – 6%
Internet – 5%
Television – 4% (Capital One commercials are starting to get stale!)
Special Event/In-Person Promo – 4%
Advertising Inserts in a Newspaper – 2%
Credit Union – 2%

So that’s why you get all those junk mail offers for 0% balance transfers and other super-low rate credit cards in the mail all the time, it is by far and away the best way for a credit card company to lock you in.

This is the third post a series of Tax Relief advice articles, be sure to read the first one about Deducting State Sales Tax Instead of State Income Tax and the second one about the Alternative Minimum Tax. You can see the whole collection under the category of Tax Relief 101.

If you invest in anything whatsoever, capital gains and losses are a necessary and often misunderstood aspect of your taxes. What differentiates a long term capital gain and a short term capital gain? If I miss on an investment, how can that pain be lessened by gains you’ve had in other investments? What’s this I’ve heard about dividends being taxed at a lower rate? Get your pens and pencils and read on.

Long Term vs. Short Term Gains
If you’ve owned the investment for over 366 days (1 year plus 1 day), then it is taxed as a long term capital gain. If you’ve owned it for less than a year, it’s taxed as a short term capital gain. It’s as simple as that.

Recently, the long term capital gains tax rate was lowered by 5% for every tax bracket (effective until 2008) . Now, the rates are 5, 15, 25, and 28%. If your income is taxed in the 10-15%, your maximum long term capital gain tax is 5%. Everyone else is taxed at the 15%. The 25% rate applies to real estate you’ve sold that you claimed any depreciation on (Section 1250 property). The final 28% category is for small business stock and collectibles.

Short term capital gains? They’re taxed as income for the year! If you’re in the 15% tax bracket, it’ll be taxed at 15% (instead of at 5%). That’s why they say that short term capital gains can eat into your stock profits because of the significantly higher (10% difference) tax rate.

Capital Losses Offsetting Capital Gains
If you make a bad pick (or two or twenty), any losses you sustain can be used to offset any gains you had this year. If you had a particularly bad year and had no gains, up to $3,000 of the losses can be used to offset your other income. If you’ve lost more than $3,000, then you can carry it to the following year. That’s why you hear advice from professionals about selling stocks in which you’re in the red in order to offset the gains you’ve had. One important rule you must understand is the “Wash Rule” which only allows this offset if you do not repurchase the stock within 30 days, otherwise this is thrown out.

Dividends Taxed at 5, 15%
Remember the two tax brackets for gains? Well now dividends are taxed at those rates, 5% for 10-15% taxpayers and 15% for everyone else.

I hope I’ve covered a few of the big concepts of capital gains taxes that give people the most trouble and dispelled some of the misconceptions people carry around. I wouldn’t let capital gains taxes dictate your investment strategy but it’s a very important aspect to always keep in mind.

I’m willing to bet that on more than one vacation, someone has come up to you and offered you something free to sit in on a timeshare sales pitch. This happened to me on a vacation to Las Vegas, NV, in 2004 outside Treasure Island. The pitch was for Polo Towers, which is a piece of property closer to the Mandalay Bay end of the Strip than the TI end. I was apprehensive so we passed. The next day we’re walking through the mall in the Aladdin when we passed a booth and that’s when we agreed to go do it in return for eight tickets to Folies Bergere at the Tropicana, which is a classic Las Vegas second or third tier show.

Basically it was three hours of aggressive sales marketing of the Polo Towers and the vacation club/network. The price started at around $15k and soon dropped to somewhere in the $3-4k region by the third hour. We lied about our credentials (you needed to be 23+ and have a salary greater than $40k), because otherwise only I would qualify since the others were still in school, but they didn’t check. We were handed off twice and different sales pitches were used (nice guy peddling a good deal, not as nice guy peddling a great deal, mean bitch who was pissed of we weren’t jumping on an awesome deal). After taking our tickets and walking out we were offered $200 for the four of us to go back the next day and try it again but we declined because we valued our three hours more than $50 a person.

My advice to you if you’re asked to do it… take the freebie if you’re willing to say no to people who will grow increasingly abusive as the hour goes on. If you can’t stop your impulse buying, do not do this.

When I returned home from the trip I had a few questions and so I wrote them down, collected the answers, and here they are.

What’s the deal with timeshares? Why are companies willing to give you all sorts of free stuff just for you to sit down and listen to a timeshare presentation?
They do it because they can make a ridiculous amount of money if only a small percentage of people buy the timeshare. This page is designed to answer the lesser known questions as to how timeshares work, not necessarily the better understood parts of timeshare types, trading timeshare rights, etc. I wanted to tell know about how the soft underbelly works like how they can afford to give stuff away, the resale value of timeshares, and other quirky things you probably didn’t know and didn’t know how to ask.

How can they afford to give people such good incentives to listen?
The developer creates a timeshare by buying land and developing a resort, then selling units to people willing to buy them. Some of these developers are shady and cheats (the first bunch were, that’s why timeshares have a bad reputation) but some are well known like Disney’s Vacation Club. Once done building, they start their marketing program to peddle the units to buyers and will spend upwards of 50% of the final sale price of a unit on marketing alone. They might bring in an outside outfit to do the marketing, but eventually when you pay $10,000 for a timeshare, about $5,000 was on marketing.

How is the resale value of timeshares?
Terrible. Bad. Awful. Supply far exceeds demand, as evidenced by the fact that the original developers are giving away huge freebies just for people to listen to pitches. An individual can’t possibly compete on that level with developers! Add that to the fact that you can’t even research how similar units are selling, as you would in traditional real estate, and you’ll find you’re in a very bad situation. This is the perfect buyer’s market. That means if you want a timeshare, buy it used!

How can I buy it used?
If you know where you want the timeshare, call them directly. They usually have listings of units looking to sell. There are also resale brokers specializing in timeshares, otherwise, just do a search online or in the newspaper for a listing. Online there are various sites that have listings of people looking to sell along with prices so as a buyer you can do a little comparison shopping. Getting a 50%+ discount on a timeshare for buying used is not unheard of.

Shoot! I bought and now I don’t want it, help! How do I cancel a timeshare purchase?
Usually the contract will have a cooling off period of less than two weeks, check the contract and if you still have time, cancel! Past that time? Chalk it up to buyer’s remorse, enjoy the vacation because it beats getting a hotel at the last minute and paying out the nose. Timeshares in general aren’t a bad idea, otherwise no one would get them, but playing the waiting game is the way to go. Always wait if you’re hesitant because you can 1) always get more freebies to listen to a presentation and 2) get the next timeshare offer.

This timeshare is too good to be true! How is it this cheap?
Either no one else wants that timeshare or you’re really lucky. Actually, there are annual fees, maintenance fees, usage fees, trading fees (say if you trade resorts), and other various fees you probably aren’t thinking of. Timeshares are a good deal (if you don’t mind being “forced,” in some cases, to use a vacation each year) for some so the fees are overcome.
Another thought is that perhaps you are being scammed. If it sounds too good to be true, walk away. They will be pushy, but just walk. Then do an internet search and see if it’s shown up because chances are it wasn’t tried on you first and someone else blew the whistle. Worst case? You don’t get a timeshare and you can do it some other time. No big loss.

The more information I find, the more I will post.

Resources:
Timeshare Secrets Exposed – Comprehensive site detailing much of what you need to know about timeshares.
The Timeshare User’s Group – Most of the information I’ve provided was learned from reading that site and the advice it’s given. Stephen J. Nelson’s Timesharing 101 presentation is a definite must see if you have the time.

Ever wonder how much an hour of your time is worth? We grapple with this question all the time without really quantifying it more than we realize. Is it worth driving the extra two minutes to save five cents a gallon on gas? Which flight to pick, the cheaper one or the shorter one with no layovers? While we probably have a mental concept of how much an hour is worth to us ($10? $20? $200?), wouldn’t it be useful to get something tied in with our current salary?

I found this little tool, MSN’s Time Value Calculator, which takes your salary, how much you work (and travel as a result of work), subtracts all your typical expenses and crunches out a number that is your “worth.” The result is basically how much take-home-pay per hour you are getting from your job. What that means is if you could turn that hour into work, then you would earn an additional scratch.

Where it starts to get dangerous is when it starts to tell you how you can use this little tool. It says that if you can hire someone to do something for you at a cost less than what it would be for you to do it (based on your salary), you should hire them if you have the cash sitting around in your mattress. If instead of doing that chore I could generate income at the rate the calculator states, working overtime or a second job, then it would make sense to hire someone because I earn more than I would pay. (You need to do 10 hours of chores a week, if you can pay someone to do it for $6/hr and then earn money on the side at $12/hr, then you’ve earned yourself $60) But is that realistic? Mostly likely not for the vast majority of people.

Summary: It was a fun little calculator to use but I wouldn’t base any decisions solely on the numbers that it produced because I value my free time more than how much the calculator says its worth (probably on the order of two or three times more). But it gives you an idea of how much you’re being paid at work after taxes and typical expenses.

So how much are you worth?

This is the fourth post a series of Tax Relief advice articles, you can see the whole collection under the category of Tax Relief 101.

If you’re like me, you’ve heard about this ugly Alternative Minimum Tax (AMT) monster that will come and make you pay more taxes. And just like me, you know nothing about it. In this installment of Tax Relief 101, the AMT monster will be explained so you understand why it’s here and what it means for you.

Background: Back in the days of yore, a lot of high-income folks were finding very creative ways to get out of paying as much tax as they were expected to. The government obviously found this very frustrating so they created an alternative set of rules to assess tax liability because they felt that at a certain level of income, you should pay at least a certain amount. The AMT is simply your tax liability calculated by those alternate rules and but it’s starting to apply for more people than before and it’s pissing all those people off.

Basics: When you’re doing your taxes, you’ll arrive at a number which is how much in taxes you will pay for last year. It will be higher than what you wanted to pay. Then, you calculate how much you would pay according to the AMT rules and what you owe is the larger of the two numbers (awesome!). Technically, you pay your regularly-computed tax and then the difference between that and the AMT is considered your AMT.

How To Calculate:
Easy Way: Get some good tax software and it will calculate it for you.
Hard Way: You can compute your AMT using Form 6251 which you can download from IRS.gov. Just get the software.

So basically AMT is Congress’ way of getting you to pay a minimum amount, even if you have completely legal deductions that would reduce your tax liability! Is there anything you can do? No, unless Congress changes the rules. The only good news is that a portion of your AMT can be credited back to you in future years. This is how you do it:
1. Figuring Available Credit – First you need to figure out how much of the AMT you paid the year before is eligible to come back and help you this year. You need to figure how much of the AMT from that year is the result of timing issues, that is anything you did to delay reporting income as opposed to something that just reduced your reportable income. You can use Form 8801 to figure out how much credit is eligible.
2. Figuring How Much Credit You Can Use – Then, after you’ve figured how your regular tax and AMT for this year, you can use any available credit from the prior year to cover the difference between regular tax and AMT if your regular tax is greater!

Example: In 2004, you owe $10,000 in regular tax and $8,000 according to the AMT, thus your tax liability for 2004 is $10,000. You calculate that you have $4,000 in credit from the AMT from 2003. You may use $2,000 of that credit, the difference between regular and AMT, and apply it towards your tax liability of $10,000 so that you only owe $8,000 of tax for 2004.

So basically, high-income people were pushing off their income to be taxed in a later year so Congress created the AMT to capture the tax this year and give them credit next year when they do report it. It’s a interest-free loan from your pocket to the US Government. The downside is that now it’s affecting people without high-incomes who are taking deductions they should be taking.

Ultimately, what this means to you is that you need to do more math (or your tax program/accountant does more math), but at least now you have an inkling as to why you need to do more math.

Amazon has setup an interesting new program called Amazon Prime: “All You Can Eat” Express Shipping. Basically you pay $79 per year and you get free two-day shipping on “over a million in-stock items” and overnight shipping for $3.99 an item if ordered before 6:30 PM Eastern. The only other noteworthy item is that you can add four additional members as long as it ships to the same address. There are also some restrictions regarding where you are shipping to (PO Boxes, APO/FPO addresses, etc).

Is this really worth it? I have purchased hundreds of items from Amazon and was always able to use the “FREE Super Saver Shipping (5-9 business days)” as long as it wasn’t a third party item. My initial belief is that if you want to instant gratification of receiving an item in two days (or one day) this may be a good program to join. If you aren’t as picky or in a rush most of the time, free shipping probably is good enough.

Let us analyze:
Book: Tournament Poker for Advanced Players (Advance Player) by David Sklansky ($19.77). It’s a 245 page book that weights 14.4 oz.
FREE Super Saver Shipping (5-9 days) – N/A (under $25)
Standard Shipping (3-5 days) – $3.99
Two-Day Shipping (2 days) – $9.48
One-Day Shipping (1 day) – $16.48

Well… we picked a standard book that was eligible for the free service (if we ordered more) and the two day shipping was almost ten bucks and the one day was nearly $17 dollars!

Electronics: SANDISK SDMSPD512768 512MB Memory Stick Pro Duo Card ($62.99). They pegged this card at a pound but it’s probably a fraction of that.
FREE Super Saver Shipping (5-9 days) – FREE
Standard Shipping (3-5 days) – $5.58
Two-Day Shipping (2 days) – $10.48
One-Day Shipping (1 day) – $17.48

Hrm… we can get it shipped to use in a week-plus or we can pay to get it ASAP.

Kitchenware: Circulon Classic 14-Piece Cookware Set ($199.99). This beast weights 31 lb. and needs to be shipped by itself but still qualifies for free shipping.
FREE Super Saver Shipping (5-9 days) – FREE
Standard Shipping (3-5 days) – $23.28
Two-Day Shipping (2 days) – $39.68
One-Day Shipping (1 day) – $76.68

Wow, 31 lb. sure is expensive to ship. I think we’re getting the idea here thought….

Amazon is probably tired of the free shipping number on their balance sheets getting larger and larger (according to this Reuters article [article archived] they lost $197M in 2004) and perhaps they’re trying to get some payment? Wrong. They believe this plan will cost them even more in shipping losses (free shipping, still free, pay shipping now makes 2 day free and even faster shipping cheaper) but Amazon is in the business of capturing market share, not showing profitability.

What does this mean for you? My initial thoughts were proved correct: Semi-instant gratification (2 days) or really-close-to-instant gratification (next day) has been made cheaper by quite a bit, especially for high volume consumers. The rest of us who aren’t in a hurry simply won’t benefit from the new plan, but we probably knew that before we started.

For more info, you can check out the Amazon Prime FAQ for all the other specifics we glossed over.

This article has been made somewhat obsolete for 2006 (2005 tax year). The rules are the same but the documents you reference have changed. See the note at the end of the article.

Welcome to the second article in a series I call Tax Relief 101 designed to help you save some cash from the tax man. You can see the whole collection under the category of Tax Relief 101.

(Click to continue reading…)

Many people know that Certificates of Deposit (CDs) and Money Market Certificates (MMC) are one of the safest investment vehicles out there, but who wants to tie up their money all those years for the more attractive rates? The answer is no one. That’s why one of the “plans” that many financial advisers advocate is a laddered CD/MMC investment strategy where you purchase multiple certificates are different maturing dates so that you can lock in the best rates for your money. The net effect is after a few years, you own the best possible rates on your CDs that you could get.

Example:
You have $5,000 to invest. In the above plan, simply invest in the following:

• $1,000 in a 1 Year MMC at 3.00% APY
• $1,000 in a 2 Year MMC at 3.50% APY
• $1,000 in a 4 Year MMC at 4.25% APY
• $1,000 in a 5 Year MMC at 5.00% APY
• $1,000 in a 7 Year MMC at 5.15% APY

(These values are from The Pentagon Federal Credit Union, or PenFed, which are probably the best rates out there, as of 2/17/05)

What happens is in a year, your 1 Year MMC matures, so you want to invest in another 7 Year MMC with that original investment to get the best rates. After another year, your 2 Year MMC matures and you invest in yet another 7 Year MMC. This continues and you keep locking in the best prevailing rate at the time for the safest investment. And these CDs are federally insured up to $100,000 by the National Credit Union Administration (NCUA), which is the Federal Deposit Insurance Corporation (FDIC) for credit unions.

Want to try it? PenFed’s minimum purchase requirement is a mere $1,000 per MMC and the eligibility requirements are actually pretty lax. Basically if you or a family member is a member of the armed services (Active, Guard/Reserve, or Retired), then you’re definitely eligible. They list other eligibility methods. If none of those fit, join the National Military Family Association which is a great organization that I am a member of and only costs $20 a year. If you happen to use Geico as an insurer, the NMFA is a member organization so if you mentioned to Geico that you are a member of NMFA, they will knock 7-8% (I forget which) off your bill.

The tradeoff you’ll have to consider is that if you put it in a completely liquid ING Direct account, you’ll get 2.35%. If you go with Emigrant Direct, you’ll be getting 3.0%, and that’s totally liquid which the MMC’s are not. Read this post on where to park short term funds for a discussion of ING Direct and Emigrant Direct.

Welcome Tax Relief 101, a series of articles I plan on writing that will help you take advantage of the some tax breaks many folks don’t know very much about. I will churn up the tax manuals and give you a summary that will make sense to normal people and not just number crunchers. You can see the whole collection under the category of Tax Relief 101.

There are two types of education credits available: Hope Credit and Lifetime Learning Credit. Everyone in your tax family (you, spouse, dependents) can claim either of the credits but not both. How much credit you receive depends on what you’ve paid for “qualified tuition and related expenses” (which we will discuss later) and your modified adjusted gross income (mAGI).

“Qualified Tuition and Related Expenses”
Qualified – tuition and fees required for attendence/enrollment (to an institution eligible to participate in the Dept. of Education’s student aid program, i.e. if you have doubts, it probably isn’t eligible). Books, supplies, and equipment if necessary for attendence. Finally, student activities fees if they must be paid for attendence/enrollment.

Example: A student activities fee for usage of campus facilities is valid if all students must pay. A fee for student tickets to sporting events are not valid because it is optional.

Now we’ve covered who is eligible (people in your family) and what they are expenses eligible (they basically must pass the smell test), let’s investigate the specifics of either.

Hope Credit: Each student is only allowed to claim this credit twice (two years) and allows for $1,500 of benefits (structured as 100% of the first $1,000, 50% of the next $1,000; so you will need to spend $2,000 for full benefits). It is also phased out if your mAGI is between $42k and $52k and completely gone if your mAGI is above $52k. There are additional rules for eligibility:
1. Hasn’t completely two years of post high school work (ie. not a junior or senior).
2. Was enrolled in a “recognized educational credential” for at least an academic period.
3. Going to school at least half time.
4. Free of conviction for any drug charge (felony possession/distribution at the federal or state level)

Lifetime Learning Credit: So Hope is for the first two years, Lifetime is for the rest of your life. It’s 20% of the first $10,000 paid for all eligible learners in your family. The eligibility requirements are looser (you don’t need to be going half-time to a school giving our real degrees) and you can claim it as many years as you want. One downside is that the credit is reduced if your mAGI is between $42k and $52k.

I hope this has opened up your mind a little to look at other tax breaks if you don’t qualify for either of the Hope or Lifetime credits. Check back again soon for discussions of other financially beneficial tax breaks.

Related Articles:
IRS Publication 970 – This is IRS document we summarized. It’s pretty readable but we’ve boiled down the generalities in this article.

Whether you’re Earth-conscious/friendly or just looking to save a few bucks, energy conservation makes good financial sense regardless of your intentions. There are several sites online that give you a rough estimate of how much money you’ll save on your bill if you take a few simple steps to conserve wattage.

First things first, large appliances and large fixtures eat up the most electricity. Basically these are you’re heavy hitters: Air Conditioning, Washer/Dryer, Lights, and Refrigerator/Freezer.

Air Conditioning: Consider using a fan or installing ceiling fans instead of using the Air Conditioning. Or consider setting the air conditioning at a higher level and using fans in conjunction. You can expect savings of over 6000 kWh/year simply by using a ceiling fan instead of running the AC. Look at your electric bill, see how much that would save you, and then decide if you want to install some fans. It is estimated that, for cooling, every degree below 78 increases your usage by about 6-8%.

Consider getting a timer, so you don’t cool when you’re not around (it’s a waste!). Timers are cheap and many have reaped the dividends many times over. Also consider replacing your old system with a new one. It is believed that a system made before 1988 probably uses more than twice the energy as one made today.

Another note about fans, they don’t cool the air, they simply move it. As you stay stationary, your body warms the air around you and so you’ll feel warmer. The fan will simply push that air away so you can feel cooler air around you. What that also means is leaving a fan on in a room you’re not in is a waste.

Washer/Dryer: This is where you can save a few dollars without even noticing (unlike the niceties of AC, how you wash/dry clothes probably doesn’t matter as much). If you just air-dry your clothes on a rack instead of using the dryer, you can expect to save about 1500 kWh/yr. You might notice that change because fabric softener sure is nice… but use cold water instead of hot water to wash and you can save 1200 kWh/yr. If you use warm instead of hot, you can still save 600 kWh/yr. And these aren’t difficult changes to enact, you won’t even notice you’re using cold water.

Lights: Here is where there’s a lot of debate between using regular incandescent bulbs and compact fluorescent bulbs. Fluorescents use significantly less electricity but take longer to warm up and produce a nice “clean” light.

Refrigerator/Freezer: This is simply a matter of figuring out how much energy your current refrigerator is using and how much the newer models are using. A new fridge will probably run you around $500 and will last you maybe twenty years or so. A typical fridge from ten or fifteen years ago probably eats up about 900 kWh/yr so do your math and see if it makes sense. As for standalone freezers, if you can save money by buying in bulk from Costco then you may justify using that freezer. Most are energy guzzlers and if you don’t need it, get rid of it.

Next we will look at the smaller appliances and some appliances you didn’t think used that much power. Almost everything that draws juice will have a label on it that will tell you how many watts it runs on. If it only has amp(ere)s, then multiply by 120 because our outlets are 120 volts (amps * volts = watts) to find out the watts it’ll use.

Key Points:
1. That number is the maximum it’ll draw, the average draw may be lower. Plus it won’t tell you how much it’s really drawing but it will tell you the max it will draw in a month. It’s not an exact science.
2. Advertisements are usually for output, like your speakers are a certain wattage, etc. The draw is probably higher.
3. When off, some things still draw power, even if nothing is being displayed. You obviously expect anything with a display to draw power but even that receiver, when off, still draws power because there is a transformer inside.

GeneratorSales.com has a great list of how much each appliance will draw. It’s obviously just a sample because it’ll vary from brand to brand and from model to model. It’ll give you a good starting point.

There are several ways to check how much things are really using, the easiest is to use something like the P3 International Kill-a-Watt Electricity Usage Monitor. You can use it to see how much energy appliances are using and, if you don’t need it, unplug it. It’s a nifty little tool at a reasonable price. Another great way is to just go outside and look at your meter. The numbers will go up and the dials will turn, it’s a great way to see how much your home uses as a baseline.

I hope these little tips, most of them won’t impact your quality of life or require significant costs, are helpful in getting your energy costs in check. If nothing else, hopefully they’ve given you a few ideas you can build upon for even more savings.