Category Archives: April

Know Your Number: New Consumer Credit Protections Why your credit score matters and how recent changes could help you manage and potentially improve your credit.

Until recently, you typically had to pay to see your credit score. That’s changed as a result of an initiative by the Consumer Financial Protection Bureau (CFPB). In February, the CFPB announced that more than 50 million Americans now have free access to their credit scores through their credit-card companies, and tens of millions more should have access soon.1

In more good news for consumers, the three major credit-reporting agencies agreed to changes that should make it easier to correct errors and reduce the negative credit impact for late payment of medical bills.

Your credit profile can make a big difference in your financial life, not only for major purchases such as a home or car but also for college loans, credit-card terms, and insurance premiums. Your credit profile might even come into play when you apply for a job or rent an apartment. Considering the recent changes, this may be a good time to take a closer look at your credit score and your credit report.

Three Key Digits

The next time you receive your monthly credit-card statement, look for your score or check your online account. If you don’t see your score, ask when it will be provided. Free access to credit scores is an important benefit that could be the foundation for managing your credit. However, be sure you understand which score you are receiving and how to interpret it.

The most common credit score, and the one typically shared by credit-card companies, is your FICO® score — a three-digit number ranging from 300 to 850; this scoring model from Fair Isaac Corporation comes in several editions and variations. The VantageScore, developed by VantageScore Solutions, used a 501 to 990 scale in the past, but the newest VantageScore 3.0 uses a 300 to 850 scale. Multiple versions of these scores may be available to lenders, and scores might differ among reporting agencies. Even so, knowing at least one version of your score should provide a good clue regarding how a lender might perceive your credit risk.

What’s a good score? It can vary by situation. However, the CFPB published a report in 2013 that classified FICO scores in four categories: superprime (720 or higher), prime (660 to 719), core subprime (620 to 659), and deep subprime (under 620). At that time, it was estimated that 65% of Americans had superprime or prime scores.2

New Consumer Protections

In a March 2015 settlement with the state of New York, the three major credit-reporting agencies — Experian, Equifax, and TransUnion — agreed to changes that provide more leverage and flexibility for consumers. Although the settlement is with a single state, these changes should be implemented nationally over the next 6 to 39 months.3

Reports and disputes. Since 2005, the Fair Credit Reporting Act ensured consumers the right to receive one free copy of their credit reports annually from each of the three major agencies. Under the new agreement, consumers who are disputing their reports will be able to receive a second free copy from each agency within a one-year period.

Even more important, agencies must have trained personnel examine documentation from both the consumer and the lender and make a decision based on the evidence. In the past, the agencies examined documents from the consumer but generally accepted a lender’s assertion regarding a disputed issue. A CFPB report found that, on average, only 15% of disputes were resolved by the agencies and the other 85% were referred back to the lenders.4

Medical debt. About 43 million Americans have past-due medical debt on their reports, often due to difficulties with insurance companies or the strain of paying a large lump sum.5 Credit-reporting firms now have to wait 180 days before adding medical debt to a credit report. In addition, they must remove medical debt from reports when the debt has been paid by an insurance company. Other delinquencies may remain on a report for up to seven years, even after the debt has been paid.

Improving Your Score

If your score is lower than you expect or think you deserve, your first step should be to obtain your credit report from each agency and make sure that all versions are correct. Even if you have a high score, you should check your report on a regular basis.

You can order a free credit report annually from each of the three major credit-reporting agencies at annualcreditreport.com or by calling (877) 322-8228. If you find inaccurate information on your report, contact the agency in writing, provide copies of any corroborating documents, and ask for an investigation.

Whether your goal is to improve your score or maintain your current score, the following tips may help.

Use at least one major credit card regularly and pay accounts on time. Setting up automatic payments could help you avoid missed payments.

If you do miss a payment, contact the lender and bring the account up-to-date as soon as possible.

Keep balances low on credit cards and other revolving debt. Don’t “max out” your available credit.

Don’t open or close multiple accounts within a short period of time. Use older credit cards occasionally to keep them active.

For more information on obtaining and disputing your credit report, visit consumer.ftc.gov/topics/credit-and-loans.

1–2) Consumer Financial Protection Bureau, February 19, 2015, and October 1, 2013
3–5) The Wall Street Journal, March 9, 2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Interested in Interest Rates? Interest rates are expected to rise in 2015. Test your interest-rate knowledge by taking this short quiz.

After dropping to historic lows during the recession, interest rates are expected to rise in 2015. Try this short quiz to test your interest-rate knowledge.

1. Which of the following interest rates is directly controlled by the Federal Reserve Open Market Committee.

A) Prime rate
B) Federal funds rate
C) Mortgage rates
D) All of the above
E) None of the above

2. The Federal Reserve typically ______ interest rates to control inflation and ______ rates to help accelerate economic growth.

A) raises / lowers
B) lowers / raises

3. The stock market tends to applaud higher interest rates.

A) True
B) False

4. When interest rates rise, the value of _____ bonds generally decreases.

A) municipal
B) Treasury
C) corporate
D) existing
E) new

5. The longer a bond’s maturity date, the _____ sensitive its value is to fluctuations in interest rates.

A) more
B) less

The principal value of bonds may fluctuate with market conditions. Bonds redeemed prior to maturity may be worth more or less than their original cost. Investments seeking to achieve higher yields also involve a higher degree of risk.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Special Bequests for Special People A personal property memorandum could be used to make bequests of specific items to heirs.

Having a Last Will and Testament can help ensure that your estate is distributed according to your wishes. Yet almost two out of three Americans have not taken this important step.1

If you don’t have a will, it would be wise to create one. If you already have a will, you may want to review it periodically to make sure it still reflects your intentions and current family situation — and you might want to make some special bequests.

More Than Just “Things”

There are two ways to leave assets in a will: a general bequest and a specific bequest. For many people, the general bequest is fairly straightforward. For example, you might leave the bulk of your estate to your spouse, with your children as contingent beneficiaries.

However, there also may be specific items that you want to leave to a particular person — a family member or a friend. It might be a piece of jewelry, a musical instrument, a work of art, a furniture set, even an old car. Sometimes these “things” can have more meaning to your heirs than any money you may leave them. And though it’s fairly easy to divide financial assets among multiple heirs, a treasured object cannot be divided. By taking steps now, you can help avoid potential conflicts.

You could make specific bequests in your will, but it might be easier to create a personal property memorandum in which you simply list each item and who you want to inherit it. You should sign and date the memorandum, but you do not need to have your signature witnessed or notarized because the memorandum in itself is not a legal document. In most states, you can make it a legal document by referring to it in your will. Even if your state does not consider the memorandum legally binding, your heirs will have a clear indication of your intentions.

Most types of tangible personal property may be included in a memorandum, but you cannot use it to bequeath real estate or intangible property such as money, bank accounts, securities, and copyrights. Be sure to consult with an experienced estate planning professional who is familiar with the laws of your state.

1) Rocket Lawyer, 2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Mutual Funds and ETFs In spite of their similarities, there are some key differences between ETFs and mutual funds.

Exchange-traded funds (ETFs) combine the diversification of mutual funds with the liquidity of individual investments, which is one reason they have attracted investors in recent years. ETF assets have more than tripled since 2007, reaching $1.8 trillion by mid-2014. Still, that figure falls far behind the $13.1 trillion of assets invested in mutual funds.1

Both ETFs and mutual funds are portfolios of securities assembled by an investment company. Their underlying investments are typically selected to track a particular market index, asset class, or sector — or they may follow a specific strategy. You might invest in both types of funds to create a broad core portfolio or to target narrower market segments.

Because mutual funds and ETFs can hold dozens or even hundreds of securities, they could provide greater diversification at a lower cost than you might obtain by investing in individual stocks and bonds. Diversification does not guarantee a profit or protect against investment loss; it is a method used to help manage investment risk.

In spite of their similarities, you should be aware of some key differences between these two types of pooled investments.

Trading. Typically, mutual fund shares are purchased from and sold back to the investment company, and the price is determined by the net asset value at the end of the trading day. By contrast, ETFs can be bought and sold throughout the trading day like individual stocks. The price at which an ETF trades on an exchange is generally a close approximation to the market value of the underlying securities, but supply and demand may cause ETF shares to trade at a premium or a discount.

Costs. Although ETFs often have lower expense ratios than similar mutual funds, you must pay a brokerage commission whenever you buy or sell shares of an ETF. Thus, mutual fund shares may be less expensive to purchase on a regular basis than ETF shares, but they might be more expensive to own over a long period of time.

Taxes. Because of their structure, ETFs tend to be relatively tax efficient. Only a small percentage of ETFs distribute capital gains, so you would not incur capital gain taxes unless you sell shares for a profit. For this reason, high-income investors may favor ETFs over mutual funds for assets held in taxable accounts. (Some ETFs may occasionally distribute capital gains if there is a shift in the composition of the underlying assets.)

Accessibility. Because a brokerage account is needed to purchase shares, ETFs are not widely available to investors who make regular contributions to employer-sponsored retirement plans. Outside of a workplace plan, mutual funds may require a minimum investment (typically $1,000 to $3,000); this is not the case with ETFs.

Exchange-traded funds have matured into sophisticated tools that may serve specific portfolio needs, but they are not appropriate for everyone. The ability to buy or sell shares quickly during market hours could encourage you to trade more often than needed or to make emotional trading decisions during bouts of market volatility.

The principal value of ETFs, mutual funds, and stocks will fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.

Exchange-traded funds and mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

1) Investment Company Institute, 2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Homeownership Can Pay Off at Tax Time Tax incentives available to homeowners, like deducting mortgage interest, can make homeownership attractive to some.

Young professionals might want to invest in a first home, growing families may need more living space, and empty nesters could be ready to downsize. Whatever the motivation, spring is often the time when households start preparing for such a move.

Although home prices nationwide are still recovering from the housing crisis, the number of homeowners with underwater mortgages has declined.1 Federal mortgage regulators have also taken steps to ease the tight credit standards that have stymied some potential borrowers in recent years.2 A healthier housing market and an improving employment situation suggest that many Americans may be in a better position to buy or sell homes in 2015.

The ability to write off mortgage interest and other home-related expenses can be a significant financial incentive. To take advantage of the tax savings, homeowners must itemize their deductions on Schedule A of their federal tax returns instead of claiming the standard deduction.

Deductions Add Up

Interest. The mortgage interest deduction generally applies to a primary residence and a second home such as a vacation condo, mobile home, boat, house trailer, or any structure with sleeping, cooking, and toilet facilities. However, special rules may apply to a second home if it is rented for part of the year.

The deduction for mortgage interest applies on up to $1 million for first mortgages (secured by the home) plus up to $100,000 for home-equity loans. The interest deduction is especially valuable for homeowners with a jumbo mortgage or two home loans. For a married couple filing jointly who are subject to a 30% tax rate, deducting $24,000 in mortgage interest could result in a tax savings of up to $7,200.3

Property taxes. The legal property owner can also deduct real estate taxes in the year that they’re actually paid to the taxing authority, whether paid directly by the owner or by the lender through an escrow account.

Points. Paying points (or loan origination fees) up-front may help borrowers lower the interest rate for the life of the loan. When a mortgage loan is used to purchase or build a primary residence, the IRS allows the borrower to deduct mortgage points in the year they are paid — even if the seller pays them for the buyer. With a refinanced loan, deductions for points must typically be prorated over the life of the loan.

When It’s Time to Sell

A capital gain (or loss) on the sale of property is equal to the sale price minus the adjusted basis. The adjusted basis is the initial cost, plus money spent on capital improvements, less any depreciation and casualty losses claimed for tax purposes.

When a principal residence is sold, losses are not tax deductible. On the other hand, a profit of up to $250,000 ($500,000 for married joint filers) may be excluded from the federal capital gain tax.

To qualify for the exclusion, the home must have been owned and used as a principal residence for two out of the five years before the sale. Owners who cannot pass this test may be eligible for a reduced exclusion, but only if the home sale was due to a change in place of employment, health reasons, or certain other unforeseen circumstances.

Keep in mind that if you are subject to the alternative minimum tax or the Pease provision (which reduces the value of deductions for high-income taxpayers), your ability to deduct mortgage interest and other home-related expenses may be limited. Before you take any specific action, be sure to consult with your tax professional.

1) RealtyTrac, October 23, 2014
2) The New York Times, October 27, 2014
3) The Wall Street Journal, October 29, 2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Liability Protection for Business Owners Organizing as a limited liability company has its benefits and offers many of the same legal protections as a corporation.

There’s a certain amount of risk that comes with owning a business. But accidents can happen no matter how well a company is run, and the expenses involved in defending a lawsuit could prove to be devastating — whether or not the owner is found to be at fault.

Legal fees add up fast, especially if a case is complicated or goes to trial. In fact, the estimated median cost for a lawsuit ranges from $54,000 for a liability case to $91,000 for a contract dispute.1

A limited liability company (LLC) is a business structure that offers many of the same legal protections as a corporation. Establishing an LLC creates a separate legal entity to help shield a business owner’s personal assets from lawsuits brought against the firm by customers or employees. In theory, the financial exposure of the owners (members) would be limited to their stake in the company, but exceptions may include any business debt they personally guarantee or misdeeds (such as fraud) they carry out.

Here are some additional benefits associated with LLCs.

Tax efficiency. An LLC is a pass-through entity for tax purposes, so a firm may pass any profits and losses to the owners, who report them on their personal tax returns. Members can elect whether the LLC should be taxed as a sole proprietorship, a partnership, an S corporation, or a C corporation, provided that it qualifies for the particular tax treatment.

Simplicity. In most states, an LLC is easier to form than a corporation, and there may be fewer rules and reporting requirements associated with operating an LLC. The management structure is less formal, so a board of directors and annual meetings are not usually required.

Flexibility. Being registered as an LLC may facilitate growth because it’s possible to add an unlimited number of owners and/or investors to the business, and ownership stakes may be transferred easily from one member to another. LLCs may also be owned by another business.

The specific rules for forming an LLC vary by state, as do some of the tax rules and benefits. Because state laws allowing for LLCs have only been on the books for about 30 years, their liability protections haven’t been tested in the courts to the same extent as they have for corporations.2

1) National Center for State Courts, 2013
2) National Federation of Independent Business, 2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.