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February 2010
First American Bank
Private Client Group
1650 Louis Avenue
Elk Grove Village, IL 60007
Fax: 847-264-2321
[email protected]
How to Double the Power of Your Tax Refund
Filing your taxes may be a dreaded chore, but
receiving your refund is a wonderful reward.
What you do with a refund is up to you, but
here are some ideas that may make your tax
refund twice as valuable.
Double your savings
Contact Info:
Jane Nagel, EVP
Phone: 847-403-8075
Chris McCurdy, VP
Phone: 847-403-8058
Kathie Montano, VP
Phone: 847-403-8062
Doug Throneburg, VP
Phone: 847-403-8071
Cray Coppins, VP
Phone: 847-586-2725
Perhaps you'd like to use your tax refund to
start an education fund for your children or
grandchildren, contribute to a
retirement savings account for
yourself, or save for a rainy
day. A financial concept
known as the rule of 72 can
give you a rough estimate of
how long it might take to double what you initially save.
Simply divide 72 by the annual rate you hope that your money will earn.
For example, if you expect an average annual
rate of return of 6%, your invested tax refund
may double in approximately 12 years. Of
course, this is a hypothetical estimate, and
doesn't account for taxes, inflation, or the actual return you may receive.
Split your refund in two
In this issue:
How to Double the Power of
Your Tax Refund
ARMed and Dangerous?
Special Needs Trusts
What can affect the cost of
homeowners insurance?
If you like to think of your tax refund as a welldeserved bonus, you may be less than enthusiastic about saving it or using it for something
practical. If stashing it away in a savings account or using it to pay off bills sounds like no
fun, go ahead and splurge on something for
yourself. But remember, you don't necessarily
have to spend it all. Instead, why not make
the most of your tax refund by putting half of it
toward something practical and spending the
other half on something more fun?
The IRS has even made it easy for you to do
this. When you file your income taxes and
choose direct deposit for your refund, the IRS
allows you to have it deposited among two or
even three accounts. Qualified accounts include savings and checking accounts, and
other accounts such as IRAs, Coverdell
education savings accounts, health savings
accounts, Archer MSAs, and TreasuryDirect
online accounts. To split your refund, you'll
need to fill out IRS Form 8888, Direct Deposit
of Refund to More Than One Account, when
you file your federal return.
Be twice as nice to others
Giving to charity has its own rewards, but Uncle Sam may reward you too by allowing you
to deduct contributions made to a qualified
charity from your taxes if you itemize. You can
also help your favorite charity or nonprofit
reap double rewards from your gift by finding
out if it benefits from any matching gift programs. With a matching gift program, individuals, corporations, foundations, and employers
offer to match gifts the charitable organization
receives, usually dollar-for-dollar. Terms and
conditions apply, so check with the charitable
organization or with your employer's human
resources department to find out more about
available matching gift programs.
Make your refund do double duty
A great way to increase the value of this
year's tax refund is to spend it on something
that might offset your overall tax bill and potentially increase your tax refund next year.
For example, this year you might want to consider spending your refund on improvements
that will increase your home's energy efficiency because you may be eligible for a tax
credit worth up to 30% of what you spend
(capped at $1,500 for certain improvements).
Qualifying improvements include certain highefficiency heating and cooling systems, and
water heaters, windows, doors, and insulation
that meet strict energy-efficiency standards.
You can find out more about this tax credit
and other credits and deductions you may be
entitled to by consulting IRS Publication 17,
Your Federal Income Tax.
Page 2
ARMed and Dangerous?
Remember how adjustable rate mortgages
(ARMs) were all the rage when the housing
market was a boom town? Especially the
more exotic ones, like interest-only and payment-option ARMs? Well, now that the housing market looks more like a ghost town, are
ARMs still a good idea, or is being ARMed a
dangerous place to be?
A short ARM review
Unlike a mortgage with an interest rate that's
fixed for the term of the loan, an ARM has an
adjustable interest rate that's tied to a published interest rate index. The index, plus a
margin set by the lender, will determine the
interest rate charged on your mortgage's principal balance. At periodic intervals (often annually), the interest rate will be adjusted, up or
down, in response to changes in the index.
Don't be
bushwhacked
If your ARM is close to
an interest rate
adjustment and you're
thinking of refinancing,
keep a close eye on
fixed mortgage
interest rates. Also
check out your
mortgage's terms for
any conversion fees or
prepayment penalties.
ARMs also have interest rate caps. The periodic adjustment cap limits the amount the
interest rate can fluctuate from one adjustment period to another; the lifetime cap limits
the total increase in the interest rate over the
life of the loan.
The allure of exotic ARMs
Some ARMs, particularly payment-option
ARMs, include payment caps that limit the
amount your monthly payment may increase
at the time of each periodic adjustment. If the
increase in the loan's interest rate would make
the monthly payment higher than the payment
cap increase allows, the payment cap limits
the monthly payment increase--and the difference (unpaid interest) is added each month to
the principal balance due. This can lead to
negative amortization, which is when your
loan balance gets larger.
Payment-option ARMs also offer the alluring
choice of a fixed monthly payment (for a
specified period) that's often less than the
amount of the monthly interest charge, guaranteeing negative amortization on the loan
from the beginning. The allure of this is the
initial low payment. In the past few years,
many people were lured into taking these
mortgages, often to buy more house than they
could ultimately afford, thinking they could
refinance once the expanding equity in the
property gave them room to do so.
But that allure doesn't last forever. At some
point (as of a specified date or when the
negatively amortizing principal due reaches a
certain percentage above what was originally
borrowed), the loan is "recast." At that point,
the loan must be scheduled to amortize both
principal and interest (at the specified rate as
of the recalculation) over the remaining term
of the loan, and any payment caps that have
been in place no longer apply.
As a result, the monthly payment may well
increase dramatically. If (as has recently
proven to be the case) the borrower's equity
hasn't increased as hoped, refinancing may
be an impossibility, and what was once alluring may become dangerous.
Should you disARM?
Not necessarily. If you have an ARM that's
now fully amortizing both principal and interest, then you may be in good shape--for now.
Conventional wisdom indicates that the risk
associated with having an ARM occurs when
interest rates are rising. But the rates for
ARMs are currently low, and are traditionally
lower than comparable fixed-rate mortgages.
So you may want to stay with the ARM you
have for the moment.
But if you are in an interest-only or paymentoption ARM, you may want to get out of it before the loan recasts--especially if your payment-option ARM is negatively amortizing. If
you still have equity in your property, conventional refinancing may be an option for you.
But if that's not the case, contact your mortgage servicer about any restructuring opportunities available to you.
Homeowners with current Fannie Mae or
Freddie Mac mortgages may be able to take
advantage of the Making Home Affordable
Refinancing plan; those with delinquent mortgages may qualify under the Modification
plan. The new mortgage balance cannot exceed 105% of the home's current value and
must be under $729,750. Call (888) 995HOPE for more information, or visit
www.makinghomeaffordable.gov.
If your lender agrees to write down your Federal Housing Administration (FHA) insured
mortgage's balance to the current value of the
property, the HOPE for Homeowners program
may help you. The new loan you obtain can
be no more than 96.5% of your home's current value, and the loan limit is $550,440. Visit
www.hud.gov for more information, or call
(800) 225-5432.
Page 3
Special Needs Trusts
A special needs trust (SNT), sometimes referred to as a supplemental needs trust, is a
trust that is established to benefit a disabled
person, or a person who has special needs,
while still allowing such persons to qualify for
and receive governmental health-care
benefits.
Background
resources. Generally, Medicaid and SSI will
look back 36 or 60 months to see if assets
have been transferred to someone else in
order to qualify for benefits, and if so, a penalty is imposed. The penalty will be that the
person who is enrolling won't be able to receive benefits for a certain amount of time.
Transferring assets to an SNT, however, does
not trigger these look-back provisions.
Some government programs aimed at assisting the disabled, such as Medicaid and Supplemental Social Security Income (SSI), are
needs based. That means that if the disabled
individual has access to more than a specified
level of resources (generally $2,000), he or
she will not be eligible to receive such benefits. In 1993, Congress officially approved the
use of SNTs to maximize the use of all available resources, both private and governmental, to provide more fully for the needs of the
disabled.
The other benefit of this SNT, of course, is
that assets in the trust will not be countable as
resources for eligibility purposes.
For persons of limited means, government
programs may constitute the primary, if not
the only, source of funding for their current
and future needs. However, government assistance is also available to families who have
resources available to meet their loved one's
basic needs. These families may be fortunate
enough to be able to use their personal resources to provide for non-basic needs as
well. With an SNT, the disabled person is able
to first tap into any government benefits to
which he or she is entitled, and then can
spend personal resources as a secondary
source for additional support and comfort.
A pooled SNT is a trust that is managed by a
nonprofit organization. Funds are pooled for
investment purposes, but separate subaccounts are maintained for each disabled
beneficiary. A pooled SNT works in the same
way as a self-settled or first-party SNT. However, with a pooled SNT, the disabled individual can create the account for himself or
herself.
Types of SNTs
Third-party SNT
There are three types of SNTs: a self-settled
or first-party SNT, a pooled SNT, and a thirdparty SNT.
A third-party SNT is a trust created by a disabled person's parent or other third party, but
this type of SNT has no payback requirement.
The person establishing the trust must not
have a duty to support the disabled child, so
the child must be age 21 or older, depending
on your state's laws. There is no requirement
that the disabled person be under the age of
65. However, transfers to a third-party SNT
may or may not trigger the Medicaid or SSI
penalty period. Again, it depends on your
state's laws.
Self-settled or first-party SNT
A self-settled or first-party SNT is created for
the sole benefit of a disabled person who is
under age 65. The trust must be established
by the disabled person's parent, grandparent,
guardian, or by the court, but it cannot be created by the disabled person. However, the
disabled person can fund the trust. For example, the disabled person could fund the trust
with money that has been inherited or received in settlement of a lawsuit, or as a result
of a divorce.
As previously stated, in order to qualify for
Medicaid or SSI, the person who is enrolling
must have a limited amount of income and
One disadvantage, however, is that upon the
disabled individual's death, any money or assets remaining in the trust must be used to
reimburse the government for Medicaid benefits extended to the individual during his/her
lifetime.
Pooled SNT
Further, any funds remaining in the account
upon the individual's death can be used to pay
back Medicaid, or they can remain in the
pooled SNT to help others in the pool,
depending on state law.
Conclusion
An SNT requires careful drafting and administration to avoid disqualification for government benefits. Be sure to consult a specialist.
In 1993, Congress
officially approved
the use of SNTs to
maximize the use of
all available
resources, both
private and
governmental, to
provide more fully
for the needs of the
disabled.
Ask the Experts
What can affect the cost of homeowners insurance?
There are many factors that
can affect the cost of homeowners insurance. Here's a
description of some of the
more common factors.
First American Bank
Private Client Group
1650 Louis Avenue
Elk Grove Village, IL 60007
Fax: 847-264-2321
[email protected]
Legal Disclaimer:
First American Bank provides this
publication for informational
purposes only and may not
accurately reflect your specific
situation. Information is not
intended to provide legal, tax, or
accounting advice; you should
consult a qualified advisor for
advice specific to your own
circumstances.
Not FDIC Insured. May Lose
Value. No Bank Guarantee
Generally, as your home gets older, the cost
of insuring it may increase. Older homes have
more things that can go wrong, often related
to outdated wiring, older plumbing, or lead
paint.
The location of your home also can affect your
insurance premium. Insurers generally regard
homes located in urban areas to be at a
higher risk of burglary than comparable suburban homes, translating to a higher premium
cost for metropolitan area houses. Insurance
may cost more if your home is located in an
area prone to a specific peril, such as floods,
or in a rural area far from a fire station or fire
hydrant.
Living in an area prone to claims for mold
damage can increase your premium. In fact,
excessive mold damage can be so costly to
Rising repair or construction costs in your
area also will increase your insurance
premium. If it'll cost more to repair or replace
your home, it'll cost more to insure it as well.
Sometimes, you can cause your insurance
rates to increase. Swings, trampolines, and
other backyard equipment can add to your
premium. Owning a swimming pool, sauna, or
hot tub may increase your property's value as
well as the risk of injury or property damage,
which will be reflected in your insurance bill.
Based on the breed and temperament of your
dog, an insurer may consider it an increased
risk of causing injury, resulting in a higher
premium. If the breed of your dog is on the
insurer's "bad dog list," you may not be able to
get coverage for injuries caused by the dog,
or your current insurance can be cancelled
altogether.
How can I reduce the cost of my homeowners insurance?
You may not have control over all of the factors that affect the cost of your homeowners
insurance. But there may be some things you
can do to save some money.
If your home is older, your insurer may lower
your premium if you upgrade your heating,
plumbing, or electrical systems to reduce the
risk of fire and water damage. Let your insurer
know when you've made these changes.
Selecting a larger deductible is another good
way to lower your cost of insurance. You
might want to put your premium savings in an
emergency fund to pay the deductible, if
needed.
Review your policy. You may be adding to the
cost of insurance by carrying extra coverage
for things that have declined in value or you
no longer own, like furs or jewelry.
Prepared by Forefield Inc,
Copyright 2010
repair that some insurers either are significantly increasing premiums to insure mold
damage, or they're eliminating coverage
completely.
Swimming pools can add to the cost of
insurance. However, many insurers may not
increase your rates if you show them that you
have safety features such as fencing or a
locking gate around your pool.
Before you get a dog, check with your insurer
to be sure your new pet won't increase the
cost of your insurance--or cause it to be cancelled. Also, advise your insurer that you've
properly trained your pet and that you've
obtained all required vaccinations and tags.
Some insurers will raise your premiums if you
file frequent (more than 2-3) claims of relatively small value. Try to use your insurance
for major claims and consider self-insuring the
rest.
Another way to save on your insurance costs
is to buy your homeowners insurance and
auto insurance from the same insurer. Most
companies will discount the cost of insurance
if you buy two or more policies from them.
You may receive a discount from your insurer
by improving your home's security. Ask your
insurer if adding an anti-theft system, flood
lights, or even dead-bolt locks will lower your
premium.