Wednesday, April 8, 2009

A disturbance in The Force - both Suze Orman and IRS ease credit card rules.

First, Suze Orman makes a big switch and recommends saving your cash instead of making extra credit card payments if you are out of work

Now Internal Revenue Service changes its mind and says you can deduct the extra convenience-fee you pay if you pay your balance due with plastic. Not the interest, though. Let's not get giddy.

Neither seismic shift has anything to do with the recent spike in Alaskan volcano and earthquake activity as far as I can tell, but they are big.

Unlike some of Orman's pronouncements, making minimum payments credit cards in order to stash away more cash for emergencies makes sense. It might even be better for the economy, writes James Surieowicki in The New Yorker. It's tough to get past the idea that credit card companies need the fees they pull out of our wallets to unjam the finance system, though.

But let's not go nuts with this idea. Being debt free or as nearly so as possible is still the thriftiest way to ride out the recession if you can swing it. Cutting expenses, setting a budget and sticking to it ruthlessly is still more effective than stringing along the credit card companies. They make money and you don't when that happens. If you are getting anything close to the national average $2,975 tax refund this year, think about using some of it pay down your highest cost plastic.

Orman didn't say so, but it's more important than ever before to make those payments on time if you go with her minimum payment idea. Potential future employers will be looking at your credit history too, along with landlords and your car insurance company. You can't afford the dings right now.

And there are some bills you need to pay no matter what - your mortgage, your car payments, and probably your health plan are nearest the top of the list. That's stuff you need and can be taken away if you don't pay. It's harder for the Capitol One crowd to repossess money you don't have.

Sunday, April 5, 2009

Tax refund rules change when you are job hunting

Tax time is a hoot on the unemployment line.

A guy named Ray Conejo in Kissimmee, Fla., apparently is using his refund to help pay for his bankruptcy filing this year. And late night TV tax doyen Roni Deutch points out, accurately, that it's easier for some of us to qualify for bigger refunds this year. With our reduced incomes, more of what we spent in 2008 bumps above the 7.5 percent of adjusted gross income threshhold that is tall cotton to itemizers.

It's a mixed boon. Like saving on shampoo because you are bald, quips Deutch crunched tax numbers this weekend. Our refunds are going to outrun our balances due by about $150. The really good news, when you are on a lean budget like ours, is that we don't owe. The not so good news is that unemployment benefits and other part-time income mean more tax work before April 15. We need to file estimated and self employment taxes too because our withholding is way down.

But what do we do with the $150 windfall? The basic advice that personal finance writers shovel out still works. Pay debts and stash as much as you can. But priorities change. We're more into stashing these days.

And whether you are employed or not, it's time to start planning for next year.

Thursday, April 2, 2009

COBRAs bite two ways

April 18 is a big deadline for employers wrestling with their health care costs, business consultants say. It's also the beginning of a potential eye-popper for us downsized workers too.

Basically, it is 60 days after President Obama's signing of the American Recovery and Reinvestment Act of 2009, the stimulus bill, and the deadline by which employers must offer subsidized COBRA health plans to any workers laid off since Sept. 1 who want the coverage.

Like those zero percent credit card offers we used to get before finance markets froze, the subsidized plan seems a sweet deal at first. COBRA is an acronym for the Consolidated Omnibus Budget Reconciliation Act of 1986, a then-groundbreaking law designed to help workers stay on their employers' health plan after losing a job.

Under the old rules that will change April 18, departing workers pay all the premiums for the coverage, which usually is two times or more higher than their former co-workers still on the job.

Under the new rules, employers pick up 65 of the premiums for nine months. That could get pricey; they must offer the plans to workers laid off Sept 1 or later, even if the workers turned down COBRA coverage at the time. Employers get a pocketful of tax credits to absorb at least some of that higher cost.

Workers get a break now, but pay radically higher costs when the subsidy runs out. The numbers from my last job are pretty typical. My wife and I pay about $230 a month for subsidized COBRA coverage now. It jumps to about $750 - the equivalent of two and half unemployment checks - when the subsidy ends.

We get good at math when we are between jobs. Only 9 percent of us who push pencils on this problem end up keeping COBRA coverage, according to the Commonwealth Fund, a New York foundation advocating more efficient health care. The rest of us either buy private insurance for our selves and families or we go on the crossed fingers and emergency room plan.