7 Things You Should Know Before You Rent Out Your Home

The single-family rental industry is booming. So many homeowners are choosing to rent out their homes these days that annual home sales dipped 5 percent in 2017, translating to about 270,000 fewer homes sold that year, according to a study by Zillow.

Contrary to popular belief, big-time real estate investors aren’t driving that growth. On the contrary, a recent report by the Urban Institute found nearly half — 45 percent — of single-family rentals are owned by investors who own just one unit.

Cindy Kluger, 50, of Rancho Santa Margarita, Calif., became an unexpected landlord in 2017.

In January, Kluger, a single mother of two — a 16-year-old son and 13-year-old daughter — inherited her aunt’s home in the popular Larchmont district of Los Angeles.

“I was sort of excited about it from the beginning simply because it’s the house where I spent all of my holidays growing up,” Kluger told MagnifyMoney. “I get the honor of caring for this house that meant so much to all of us growing up.”

The home was built in the 1920s and had been in the family for nearly half a century, mostly serving as a destination for family holiday gatherings. Because her extended family was emotionally attached to the home, Kluger knew she didn’t want to live in it or sell the property, but there were taxes and maintenance fees to cover. As an alternative, she decided to rent the entire house out.

For any first-time landlord, navigating the ins and outs of renting out a property can be challenging.

“Being an effective single-family home landlord requires discipline first and foremost,” said Brian Davis, co-founder of SparkRental.com. “Being a landlord is not an emotional business, it’s a business of operating systematically.”

Here are some practical tips for anyone planning to rent out their single-family home for the first time.

Any home improvements needed at the property

203k loan

Before you put your home on the rental market, you should make sure it has been properly inspected and that any underlying structural issues are repaired first.

“I think all homes should have an inspection, even new construction,” said Greenville, S.C.- based real estate consultant Sunny Lake. “To protect you and your investment, it’s always a good idea to have experts working for you to give you an opinion of value and condition.”.

Specifically, look for what needs to be fixed to make sure the property is both legally habitable and aesthetically marketable for prospective tenants.

Because Kluger had inherited a home that had been in her family for decades, she soon realized how many issues had been fixed with DIY repairs.

“For the past 20 years [my aunt] had put bandaids on what was broken,” she said. “I realized that everything had to be examined.”

To bring the home into the modern era, Kluger had to completely redo the home’s foundation, electricity, and plumbing, in addition to ripping out the wall-to-wall carpeting in favor of hardwood and repainting the walls.

“I think it’s super important to think about these things that you may not be aware of because you are not living in the house,” she said. “You don’t want to bring renters into that environment.”

Your property management style

One of the most important things you will need to figure out is who will be responsible for managing the property. Most crucial, you’ll need to decide who handles any general maintenance and whom the tenants will contact if something breaks.

If you take on that responsibility yourself, you may be on call 24/7 to fix a broken pipe (or call someone who can go to the property to fix it). This is the approach Kluger plans to take.

“The fact that I sort of enjoyed all of the maintenance things came as sort of a surprise,” said Kluger. As she set about renovating her home, Kluger says made several contacts with vendors in the area whom she can call if tenants report anything broken and trust they will promptly handle the request.

Lake says you can do it yourself if you are a hands-on person with a network of service providers. But, not all landlords want to take the hands-on approach.

“Landlords should hire a property manager if [they don’t live near the property], or if they don’t have the discipline to manage their properties effectively,” added Davis.

If you plan to hire a property management firm, be prepared to pay between 8 to 10 percent of the monthly rent as a fee, says Lake, although that fee will vary by location.

With that fee comes some valuable bonuses, including peace of mind knowing that the major snafus will be handled by someone else.

Having a property management company might also attract higher-quality tenants, assuming the company provides a higher level of service than you would be able to offer as a single property manager.

Property management companies may also have more experience dealing with tenant issues. If the tenants don’t pay rent, for example, the management company may have a process and a legal team already in place to help resolve the issue.

“It all depends on your accessibility, and how much contact you want to have with the tenants,” said Lake. “Lots of investors feel like the fee is worth it to not have to deal with the potential hassles of late rent, walk-throughs, property maintenance, etc.”

What you expect your tenants to maintain

Some property managers handle all of the property maintenance, while others only manage a portion and expect the tenant to do some of the work involved in keeping the property clean and looking nice.

In the case of a single-family property, tenants might be asked to keep up with lawn maintenance, pay for a garbage collection service, or even homeowners’ association fees, if applicable. And that information should be included in the lease that the tenant signs.

If you won’t allow the tenant to do any landscaping or lawn maintenance because you plan to hire a company to come handle that kind of stuff on a periodic basis, for example, that needs to be stated in writing in the lease. If the tenant is expected to cover HOA fees, the details about how you’ll collect the fee needs to be in the lease, too.

In addition, the lease would need to outline what kinds of modifications the renter is allowed to make to the property. Are they allowed to paint the outside of the home? What about the walls on the inside?

Can they install a fence to keep their dogs in the backyard? If you don’t want your tenants to make any drastic changes to the property, that needs to be clearly stated in writing.

How you’ll find reliable tenants

It’s your property, so you’ll need to decide how you’ll choose a tenant for your property. It’s easy enough to post an ad on Craigslist or Facebook, but that’s just the first step. Once you receive applications, you want to make sure you have a way to choose a tenant you can trust to pay rent in full and on time. That may involve some level of underwriting — like like pulling a credit report and running criminal background check — to check a tenant’s creditworthiness.

“Tenant screening is an art and science in itself” said Davis. He offers the following tips to simplify the process:

  1. Always run full credit, criminal, and eviction reports.
  2. Always verify income and employment.
  3. Verify housing history as best you can with not just the current landlord but a prior landlord.
  4. Consider inspecting the applicant’s current home to see if they maintain it well.

Davis recommends making the inspection of the applicant’s current home a condition of lease acceptance.

“Applicants don’t have to agree, and the landlord doesn’t have to lease to them,” he says. “But, because it’s the most labor-intensive part of screening, it should be left for last, and only done for applicants who otherwise will be accepted.”

In Kluger’s case, she decided to get the help of a real estate agent to find her first tenant. The agent will find and screen tenants on behalf of Kluger and her father, this time.

“Once she helps us with that process my intention is to educate myself and learn what needs to be done to properly screen renters,” said Kluger.

Regardless of the agent’s opinion, the landlord gets the last word.

“One of the things my dad had me ask the real estate agent is that after she screens the person and thinks she has found a good candidate that we get last say. That we get to meet them and sign off,” said Kluger.

Even if you have a real estate agent taking applications, as in Kluger’s case, Lake recommends hiring an agency to run background checks on any applicants, as they have more access to financial, criminal, and other personal history.

If you don’t have the budget to hire an agent and agency, you may be able to handle the process on your own.

There are several websites that offer tenant screening services, for a fee. A couple of examples include Spark RentalCozy, and MyRental. Cozy, for example, charges $39.99 for both a background check and credit report, but the fee is assessed to the applicant, not the landlord. MyRental reports even include a ‘tenant score’ — a three-digit number that predicts the likelihood of lease default and lets you see if other landlords in your area accepted or declined applicants with that score for around $35.

How much you’ll charge for rent

To set your number, Lake says you’ll need to know the current market value of your property, which will vary based on the location and vacancy rates. She recommends calling up experts in your market for help in determining the rent amount if you’re not a seasoned agent or investor.

“You don’t want to overprice the property and have it sit empty,” she said. “But you don’t want to underprice it and leave money on the table.”

Beware: There may be restrictions on how much you are allowed to raise rent each year. Rent control laws are passed by cities, so you should check the municipal code to see if any rent control laws apply to the area you live in.

You can find your home’s estimated value on mortgage websites like Zillow or Trulia. You can also pay to have an appraiser come and check out your property in person for a more accurate estimate.

“Appraisals are required for financing, but landlords should learn to assess market rents for themselves,” advised Davis.

You should also decide how much of a security deposit, if any, you will request. The deposit acts as security for you in case the tenant is unable to pay rent for a period of time, or to fix any damages left by the tenant when he or she eventually moves out.

The rules surrounding security deposits vary from state to state. For example, New York has no law limiting the amount a landlord can charge for a security deposit, but, if the apartment is in the rent-controlled jurisdiction of New York City, the landlord is limited to collecting up to one month’s rent for a security deposit. Meanwhile, Alabama state law limits landlords to taking only one month’s rent.

State laws may also regulate where you are allowed to keep security deposit funds, if you must first do a walk-through of the residence to collect a deposit, when you are allowed to keep the deposit, and within what amount of time you are required to return the deposit. Check landlord tenant laws in your state to figure out what rules apply to you. Here are a few resources on NoloAmerican Apartment Owners Association and Landlord.com to get started.

Outside of the law, the amount you require is up to you to decide, but will likely depend on how confident you are about the applicant’s creditworthiness. For example, if the applicant is self-employed and that causes you to be less confident in their ability to make the rent payments, you may require a larger security deposit, or ask them to pay upfront a few months worth of rent before they are permitted to move in.

How the cash flows work

If you’re looking to rent a single-family home as an investment property, you should understand the money going in and out of your investment, and how much it will cost you to make money on your rental. In other words, you should understand your cash flows.

For example, you may run yourself into the red if the rent you charge is only enough to cover your monthly mortgage payment and doesn’t take into consideration all of the other costs you’ll incur renting the property like your property tax, utilities, or what you pay to a property manager or other facility managers.

To get an idea of your cash flows, consider your maintenance costs on the property. In addition to property taxes, community fees, and general maintenance costs, you want to factor in cushion for the unexpected, like any potential lapses in tenancy during which you may not be able to receive rent, too.

“You need to have some risk tolerance to be an investor,” says Lake. “If the rental market is soft in your area, you need to have enough other cash flow to maintain your property even if it’s vacant.”

Lay out the cash flow — what you’ll be paid versus the amount of money you plan to put into the investment — and see if the number you estimate you’ll have after all is said and done makes good financial sense for you to rent the property.

What your insurance policy covers

If you’re renting out a home that’s still under a mortgage, you will likely need to purchase a landlord insurance policy to have the proper protections in place, according to Davis. The protection is similar to a homeowner’s insurance policy, but it doesn’t cover belongings.

Some homeowners insurance policies will cover short-term rentals, but most don’t cover long-term rentals like you would need to rent a home. Landlord policies generally cost about 25 percent more than a standard homeowners policy, according to the III, but you’ll get more protections in exchange for the increase.

Landlord insurance typically provides:

  • Property insurance coverage — This covers any physical damages to the structure of the home caused by nature.
  • Coverage for your personal items — If a lawnmower you keep on-site for lawn maintenance burns in a wildfire, for example, landlord insurance would pay for the loss.
  • Liability coverage — Legal and medical expenses may be covered if a tenant or one of their guests gets hurt while on the property.
  • Coverage for loss of rental income — If for some reason you are not able to rent the property — maybe it’s being repaired or rebuilt after damage from a covered loss — the insurance company should pay you the lost rental income for a specific period of time.

Since landlord insurance won’t cover your tenant’s stuff, you may also want to state in your lease whether or not you will require a tenant to keep renters insurance. When your tenant has renters insurance, that saves you, the landlord, from liability if something happens (think: fire, flood) and the tenant’s items are damaged.

How you’ll cover a bad tenant or an emergency

As a landlord, you’ll want to have an emergency fund or other fast borrowing option in place in case you need to make an unexpected major repair, or cover your mortgage for a few months in case your tenant can no longer afford to pay rent.

“Landlords absolutely, positively need a cash cushion,” said Davis.“As a rule of thumb, I like to keep around two months’ worth of rent on hand for each property, plus a source of available funds if needed.”

The fund exists to cover the occasional bad tenant or extended vacancy, and to keep up with the general maintenance of the home — in case, for example, a water heater breaks and you suddenly need $1,800 to replace it.

Lake, on the other hand, recommends landlords keep six months worth of rent in an emergency fund, but says that amount also depends on what other cash flow options you have at your disposal.

“It can be challenging for people to have that kind of cash along with a personal emergency fund,” said Lake. She recommends working with a financial advisor or property manager as a starting point.

Consider setting up an emergency fund, and contributing to it monthly. At the very least, you should have access to emergency money via quick borrowing options such as a credit card, home equity line of credit or home equity loan.

How much money you’ll need to cover a bad tenant or emergency may fluctuate depending on your property and the average amount of time it takes to evict someone, as it may vary depending on your state’s laws. You also want to consider the average time it may take to get another tenant in who will pay the rent. Check online or with a real estate lawyer in your area to calculate what the worst-case scenario may be for your situation.

The post 7 Things You Should Know Before You Rent Out Your Home appeared first on MagnifyMoney.

Tax Reform 2018 Explained

iStock

As promised, the bill formerly known as The Tax Cuts and Jobs Act arrived on President Donald Trump’s desk before Christmas. He signed it into law today.

The House (again) approved the final version of the the most sweeping rewrite of the tax code in more than 30 years. The tax bill previously passed the House — it was a 227-203 vote, no Democrats supported the bill — on Dec. 19. Then, the Senate passed the final version of the $1.5 trillion tax bill in the early hours of the morning Wednesday, Dec. 20. The vote was 51-48 along party lines.

However, in a plot twist that had to do with archaic Senate rules, the Senate’s infamous Byrd Rule forced Senate Republicans to change the bill’s name and eliminate two of its proposed provisions before taking a vote, so the House had to reapprove.

Officially, the new name of the bill is “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018”, but it’s been called the Tax Cuts and Jobs Act since it was introduced back in November 2017. The Senate parliamentarian ruled the bill’s name and two other provisions — one that would have allowed parents to pay for homeschooling with money from 529 savings accounts and another that was part of criteria used to determine which colleges would qualify for a new excise tax — had to change else the bill would violate the budget rules Senate Republicans have to follow to pass their bill through a process that prevents Democrats from filibustering.

What’s changing

Here is a breakdown of changes to come. The majority go into effect Jan. 1, 2018. Read on or jump ahead to the rules you’re most interested in:

Tax brackets and income taxes

Old Rule

New Rule (Effective Jan. 1, 2018)

There are currently seven tax brackets.

The rate on the highest earners is 39.6 percent for taxpayers earning above $418,400 for individuals and $470,700 for married couples filing taxes jointly.

New Rule (Effective Jan. 1, 2018)

The new rules retain seven tax brackets, but the brackets have been modified to lower most individual income tax rates. The new brackets expire in 2027.

Top income earners — above $500,000 for individuals and above $600,000 for married couples filing jointly — falls from 39.6 percent to 37 percent.

The majority of individual income tax changes would be temporary, expiring after Dec.
31, 2025.

2017 Tax Brackets

New Tax Brackets (Effective Jan. 1, 2018)

Single Individuals

Taxable Income

Tax Bracket

Taxable Income

Tax Bracket

$9,325 or less

10%

$9,525 or less

10%

$9,326-$37,950

15%

$9,526-$38,700

12%

$37,951-$91,900

25%

$38,701-$82,500

22%

$91,901-$191,650

28%

$82,501-$157,500

24%

$191,651-$416,700

33%

$157,501-$200,000

32%

$416,701-$418,400

35%

$200,001-$500,000

35%

Over $418,400

39.60%

Over $500,000

37%

Married Individuals Filing Joint Returns and Surviving Spouses

Taxable Income

Tax Bracket

Taxable Income

Tax Bracket

$18,650 or less

10%

$19,050 or less

10%

$18,651-$75,900

15%

$19,051-$77,400

12%

$75,901-$153,100

25%

$77,401-$165,000

22%

$153,101-$233,350

28%

$165,001-$315,000

24%

$233,351-$416,700

33%

$315,001-$400,000

32%

$416,701-$470,700

35%

$400,001-$600,000

35%

Over $470,700

39.60%

Over $600,000

37%

Heads of Households

Taxable Income

Tax Bracket

Taxable Income

Tax Bracket

$13,350 or less

10%

$13,600 or less

10%

$13,351-$50,800

15%

$13,601-$51,800

12%

$50,801-$131,200

25%

$51,801-$82,500

22%

$131,201-$212,500

28%

$82,501-$157,500

24%

$212,501-$416,700

33%

$157,501-$200,000

32%

$416,701-$444,550

35%

$200,001-$500,000

35%

Over $444,550

39.60%

Over $500,000

37%

Married Individuals Filing Separate Returns

Taxable Income

Tax Bracket

Taxable Income

Tax Bracket

$9,325 or less

10%

Not over $9,525

10%

$9,326-$37,950

15%

$9,525-$38,700

12%

$37,951-$76,550

25%

$38,701-$82,500

22%

$76,551-$116,675

28%

$82,501-$157,500

24%

$116,676- $208,350

33%

$157,501-$200,000

32%

$208,351-$235,350

35%

$200,001-$300,000

35%

Over $235,350

39.60%

Over $300,000

37%

Standard deductions

Old Rule

New Rule (Effective Jan. 1, 2018)

Taxpayers who do not itemize can claim the current standard deduction of $6,350 for single individuals, $9,350 for heads of household or $12,700 for married couples filing jointly

New Rule (Effective Jan. 1, 2018)

Standard deductions for all nearly double under the new rules.

Individuals see standard deductions rise to $12,000; fo heads of household, it rises to $18,000; and for married couples filing jointly the standard deduction increases to $24,000.

Child tax credit

Old Rule

New Rule (Effective Jan. 1, 2018)

The current child tax credit is $1,000 per child under the age of 17.

The credit is reduced by $50 for each $1,000 a taxpayer earns over certain thresholds. The phase-out thresholds start at a modified adjusted gross income (AGI) over $75,000 for single individuals and heads of household, $110,000 for married couples filing jointly and $55,000 for married couples filing separately.

New Rule (Effective Jan. 1, 2018)

The child tax credit doubles to $2,000 per qualifying child. Up to $1,400 of the child tax credit can be received as refundable credit (meaning it can go toward a tax refund). The new rule also includes a $500 nonrefundable credit per dependent other than a qualifying child.

The credit begins to phase out at an AGI over $200,000 — for married couples, the phase-out starts at an AGI over $400,000.

This rule is in effect through 2025.

Personal exemptions

Old Rule

New Rule (Effective Jan. 1, 2018)

Taxpayers can reduce their adjusted gross income by claiming personal exemptions — generally for the taxpayer, their spouse and their dependents.

Taxpayers could deduct $4,050 per exemption in 2017, though the deduction is phased out for taxpayers earning more than certain AGI thresholds. The phase out begins at an AGI over $313,800 for married couples filing jointly, $287,650 for heads of household, $156,900 for married couples filing separately and $261,500 for all other taxpayers.

New Rule (Effective Jan. 1, 2018)

Personal exemptions have been suspended through 2025.

Mortgage interest deduction

Old Rule

New Rule (Effective Jan. 1, 2018)

Currently homeowners are allowed to deduct interest paid on mortgages valued up to $1 million on a taxpayer’s principal residence and one other qualified residence.

They can also deduct interest paid on a home equity loan or home equity line of credit no greater than $100,000. These are itemized deductions.

New Rule (Effective Jan. 1, 2018)

New homeowners can include mortgage interest paid on up to $750,000 of principal value on a new home in their itemized deductions.

The old, $1 million caps continues to apply to current homeowners (those who took out their mortgages on or before Dec. 15, 2017), as well as refinancing on mortgages taken out on or before Dec. 15, 2017, as long as new mortgage amount does not exceed the amount of debt being refinanced.

Homeowners may not deduct interest paid on a home equity line of credit or home equity loan.

The $750,000 cap and the suspension on deducting home equity interest expire after 2025.

State and local tax (SALT) deduction

Old Rule

New Rule (Effective Jan. 1, 2018)

Taxpayers may include state and local property, income and sales taxes as itemized deductions.

New Rule (Effective Jan. 1, 2018)

Taxpayers are limited claiming an itemized deduction of $10,000 in combined state and local income, sales and property taxes, starting in 2018 through 2025.

Taxpayers cannot get around these limits by prepaying 2018 state and local income taxes while it is still 2017. The bill says nothing about prepaying 2018 property taxes.

Bicycle commuting

Old Rule

New Rule (Effective Jan. 1, 2018)

Taxpayers can exclude up to $20 a month of qualified bicycle commuting reimbursements from their gross income. That includes payments from employers for things like a bicycle purchase, bike maintenance or storage. Workers can claim the exclusion in any month they regularly use a bicycle to commute to work and do not receive other transit benefits.

New Rule (Effective Jan. 1, 2018)

The exclusion is suspended through 2025.

Personal casualty or theft

Old Rule

New Rule (Effective Jan. 1, 2018)

Under current tax law individuals can deduct uninsured losses above $100 when property is lost to a fire, shipwreck, flood, storm, earthquake or other natural disaster. The deduction is allowed as long as the total loss amounts to greater than 10 percent of the taxpayer’s adjusted gross income.

New Rule (Effective Jan. 1, 2018)

The new tax bill only allows taxpayers to claim the deduction if the loss occurred during a federally declared disaster, through 2025.

Alimony

Old Rule

New Rule (Effective Jan. 1, 2019)

The individual paying alimony or maintenance payments can deduct payments from their income. The person receiving the payments includes them as income.

New Rule (Effective Jan. 1, 2019)

The person making alimony or maintenance payments does not get to deduct them, and the recipient does not claim the payments as income. This goes into effect for any divorce or separation agreement signed or modified on or after Jan. 1, 2019.

Moving expenses

Old Rule

New Rule (Effective Jan. 1, 2018)

Current law allows taxpayers to deduct moving expenses as long as the move is of a certain distance from the taxpayer’s previous home and the job in the new location is full-time.

New Rule (Effective Jan. 1, 2018)

The new tax bill suspends the moving expense deduction through 2025. Until then, taxpayers are not permitted to deduct moving expenses.

Moving-related deductions and exclusions remain in place for members of the military.

Gains made on home sales

Old Rule

New Rule (Effective Jan. 1, 2018)

Homeowners can exclude up to $250,000 (or $500,000, if married filing jointly) of gains made when selling their primary residence, as long as they owned and primarily lived in the home for at least two of the five years before the sale. The exclusion can be claimed only once in a two-year period.

New Rule (Effective Jan. 1, 2018)

Homeowners can still exclude gains up to $250,000 (or $500,000 if married filing jointly) when they sell their primary residence, but they have to have lived there longer. People who sell their homes after Dec. 31, 2017 now have to use the home as their primary residence for five of the eight years before the sale in order to claim the exclusion. It can only be claimed once in a five-year period.

The new rule expires on Dec. 31, 2025.

Student loan debt discharge

Old Rule

New Rule (Effective Jan. 1, 2018)

Currently, student loan debt discharged due to death or disability is taxed as income.

New Rule (Effective Jan. 1, 2018)

Under the new tax bill, student loan debt discharged due to death or disability after Dec. 31, 2017, will not be taxed as income. The rule lasts through 2025.

Estate taxes

The estate tax, aka the “Death Tax” is a tax levied on significantly large estates that are passed down to heirs.

Old Rule

New Rule (Effective Jan. 1, 2018)

Estates up to $5.49 million in value were exempt from the tax.

The top tax rate was 40 percent.

New Rule (Effective Jan. 1, 2018)

Doubles the exemption for the estate tax.

Now, estates up to $11.2 million are exempt from the tax.

Corporate taxes

Old Rule

New Rule (Effective Jan. 1, 2018)

Under a four-step graduated rate structure, the current top corporate tax rate is 35 percent on taxable income greater than $10 million.

New Rule (Effective Jan. 1, 2018)

Permanently cuts the top corporate tax rate to 21 percent.

Pass-through businesses

Pass-through businesses are generally small businesses (also some big firms) that don’t pay the corporate income tax. Instead, the owners report the corporate profits as their own income and pay taxes based on the individual tax rates along with their regular personal income tax.

Some of the common types of pass-through businesses are partnerships, LLCs (limited liability companies), S corporations and sole proprietorships.

Old Rule

New Rule (Effective Jan. 1, 2018)

All pass-through business owners’ income was previously subject to regular personal income tax.

New Rule (Effective Jan. 1, 2018)

Under the new laws, pass-through business owners can deduct up to 20 percent of their qualified business income from a partnership, S corporation or sole proprietorship.

Individuals earning $157,500 and married couples earning $315,000 are eligible for the fullest deduction.

Medical expenses

Old Rule

New Rule

Taxpayers were previously allowed to deduct out-of-pocket medical expenses that exceed 10 percent of their adjusted gross income or 7.5 percent if they or their spouse were 65 or older.

New Rule

The threshold for all taxpayers to claim an itemized deduction for medical expenses is lowered to 7.5 percent of a filer’s adjusted gross income.

The change applies to taxable years from Dec. 31, 2016 to Jan. 1, 2019.

ACA individual mandate

The individual mandate was a key provision of the Affordable Care Act that required non-exempt U.S. citizens and noncitizens who lawfully reside in the country to have health insurance.

Old Rule

New Rule (Effective Jan. 1, 2019)

Consumers who did not qualify for an exemption and chose not to purchase insurance faced a range of tax penalties, depending on income.

New Rule (Effective Jan. 1, 2019)

The individual mandate is out.

Starting Jan. 1, 2019, consumers who do not purchase health insurance will no longer face penalties.

GOP lawmakers argue that the measure will decrease spending on the tax subsidies it offers to balance out the cost of premiums for millions of Obamacare enrollees.

However, without the mandate, experts caution that fewer healthy and young people will sign up for health coverage through the insurance marketplace, which will likely lead to increases in premium costs for those who remain the marketplace and could even induce some insurers to drop out of the market altogether. It’s a big blow to supporters of the long-embattled health care law.

529 college savings plans

A 529 college savings plan is a tax-advantaged savings account designed to encourage saving for qualified future higher-education costs, such as tuition, fees and room and board. Your money is invested and grows tax free.

Old Rule

New Rule (Effective Jan. 1, 2018)

Previously, 529 plan savings could only be used on qualified higher education expenses.

New Rule (Effective Jan. 1, 2018)

In a major victory for wealthier families, you can now use 529 savings for private K-12 schooling.

Tax benefits are now extended to eligible education expenses for an elementary or secondary public, private, or religious school.

The new rules allows you to withdraw up to $10,000 a year per student (child) for education costs.

Alternative minimum tax

The individual alternative minimum tax, or AMT, often imposed on higher-income families, especially those with children, who live in high-tax states — but not necessarily the ultra rich. It requires many households or individuals to calculate their tax due under the AMT rules alongside the rules for regular income tax. They have to pay the higher amount. Whether or not a someone pays AMT depends on their alternative minimum taxable income (AMTI). AMTI is determined through a series of assessments of a taxpayer’s income and assets — the explanation of calculating AMTI takes up two pages in the tax bill, so we’re not getting into the details here.

Old Rule

New Rule (Effective Jan. 1, 2018)

The exemption amount is $84,500 for married joint-filing couples, $54,300 for single filers and $42,250 for married couples filing separately.

The AMT exemption begins to phase out at $120,700 for singles, $160,900 for married couples filing jointly and $80,450 for married couples filing separately.

New Rule (Effective Jan. 1, 2018)

The AMT is here to stay but fewer households will have to face it.

Under the new rules, which are in effect from Jan. 1, 2018 through Dec. 31, 2025, married couples filing jointly will be exempt from the alternative minimum tax starting at $109,400. Exemption starts at $70,300 for all other taxpayers (other than estates and trusts).

The exemption phase-out thresholds will rise to $1,000,000 for married couples filing jointly, and $500,000 for all other taxpayers.

Miscellaneous tax deductions

Taxpayers can take the miscellaneous tax deduction if the items total more than 2 percent of their adjusted gross income. The amount that’s deductible is the the amount that exceeds the 2 percent threshold. These are some of the major changes coming to the miscellaneous tax deduction.

Old Rule

New Rule (Effective Jan. 1, 2018)

Tax preparation: Taxpayers can today claim an itemized deduction of the amount of money they pay for tax-related expenses, like the person who prepares their taxes or any software purchased pr fees paid to fee to file forms electronically.

Work-related expenses: Under current law, workers can deduct unreimbursed business expense as an itemized deduction, like the cost of a home office, job-search costs, professional license fees and more.

Investment fees: Taxpayers can currently deduct fees paid to advisors and brokers to manage their money.

New Rule (Effective Jan. 1, 2018)

Tax preparation: Taxpayers may not claim tax-preparation expenses as an itemized deduction through 2025.

Work-related expenses: The bill suspends work-related expenses as an itemized deduction through 2025.

Investment fees: Under the new rules, the investment fee deduction is suspended until 2025.

Tax deductions that won’t be changing

Teacher deduction

Teachers can deduct up to $250 for unreimbursed expenses for classroom supplies or school materials from their taxable income.

Electric cars

Electric car owners who bought a vehicle after 2010 may be given tax credit of up to $7,500, depending on the battery capacity.

Adoption assistance

Adoptive parents are allowed a tax credit and employer-provided benefits up to $13,570 per eligible child in 2017.

Student loan interest deduction

Student loan borrowers may deduct up to $2,500 on the interest paid for student loans every year.

The post Tax Reform 2018 Explained appeared first on MagnifyMoney.

How Apple Pay Cash Stacks Up Against Venmo

iStock

As part of an early release of its updated iOS 11.2 mobile operating system, Apple is rolling out a P2P payments platform, Apple Pay Cash, available to anyone with an iPhone or Apple tablet, Apple Watch.

Apple Pay Cash already has a lot of competition. The person-to-person (P2P) payments market is fairly saturated with other platforms like Venmo, Paypal, Square Cash, Google Wallet and the like. At the moment, Apple’s largest competition in the P2P space is social payment app Venmo, which is owned by yet another competing payments processor, Paypal. Like competitors Venmo and Paypal, Apple Pay Cash is easy to use with one way we communicate most: via text. But unlike its major competitors, Apple is leveraging its user base to provide a P2P service that comes along with ownership, rather than requiring you to download another application.

Venmo uses emojis and a social feed in an attempt to take the “awkward” out of paying or charging your friends money. The tactic seems to work. Venmo’s user base completed $9 billion in transaction last quarter, about 93% more than the same quarter a year earlier. Since September 2016, the app allowed its users to pay via iMessage and Siri, expanded its online payments business, and tested out a physical debit card with some users. The company is also reportedly, like many other P2P processors, exploring instant deposits, too, to the tune of about $0.25 per transfer.

Apple Pay Cash seems to imitate several of Venmo’s features, so the 68% of millennial mobile payment users who say they use Venmo most seemingly won’t have too much incentive to make a switch to Apple Pay Cash. However, a relatively easy setup with Apple Wallet, may appeal to those outside of the millennial demographic who aren’t already attached to Venmo, but need to send mobile payments, too.

What is Apple Pay Cash?

Apple Pay Cash is Apple’s person-to-person money transfer service. Apple users can use Apple Pay Cash to quickly send and receive money to and from friends, acquaintances and family members using Apple’s built-in messaging app iMessage. The service is available in the U.S. on iPhone SE, iPhone 6 and later, Apple Watch, iPad Pro, iPad 5th Generation, iPad Air 2 and iPad mini 3 or later. You can also ask Apple’s intelligent personal assistant, Siri, to pay someone via Apple Pay Cash.

Source: Apple

How does Apple Pay Cash Work?

You can say, “Hey Siri, send $[an amount of money] to [one of your contacts]” to prompt a message asking them which app you want to use to send the funds, including Venmo. You can also send money via iMessage by tapping the app store icon and selecting Apple Pay at the bottom.

The money you send will come from one of two sources in the Apple Wallet application: The digital Apple Pay Cash Card or any linked debit or credit cards in your Apple Wallet. The transaction is free if you pay someone using a debit card. If you use a credit card to pay another person, you’ll be charged a 3% fee. Payments are approved using a finger with Touch ID or a smile with Face ID if you have an iPhone X.

When you get paid, the money you receive is automatically credited to a digital Apple Pay Cash Card that lives in Apple Wallet, for use right away. Unlike Square Cash, you don’t get a physical card to use, but the digital Apple Pay Cash Card, like a gift card, can be used like any other debit or credit card in the Apple Wallet. You also have the option of transferring the funds on your Apple Pay Cash Card to a bank account, but that may take up to three business days.

When not using Apple Pay Cash to pay a roommate your share of the light bill or charge a friend for his share of the a group vacation, you can use the digital Apple Pay Cash Card — or another card in your Apple Pay account — at any of these retailers to pay online or in stores.

How do I get Apple Pay Cash?

To do to gain access to Apple Pay Cash, update your compatible device to iOS 11.2 or watchOS 4.2 and set up the Apple Pay Cash Card in Apple Wallet. Apple Pay Cash is not available on non-Apple devices or for use outside of the United States.

Step 1: Update your Apple device

To update the device, go to Settings, then General, then Software update. An on-screen message will let you know what version of iOS your device is running and prompt you to update if you’re using old software.

Step 2: Set up your Apple Pay Cash card

Once the device is updated, it’s time to set up the Apple Pay Cash card. In Settings, go to Wallet & Apple pay. There you will see the “Add Credit or Debit Card” option or your Apple Pay Cash card. Click on the card to set it up. Hit continue, and agree to the terms and conditions after reading them thoroughly.

Verification

The device may or may not prompt you to verify your identity when setting up the Apple Pay Cash card, but you should if you want to send or receive more than $500 per transaction.

To verify on iPhone, click the small ‘i’ with a circle around it next to the Apple Pay Cash card in the Apple Wallet app and tap Verify Identity. You will be prompted to enter personal information like your name, Social Security number and date of birth. You may also need to answer questions about your personal history or submit an image of a photo ID like a driver’s license for verification.

You can then load the card with funds using other linked debit or credit cards in Apple Wallet. The Apple Pay Cash card requires a minimum $10 deposit. However, users don’t have to load and Apple Pay Cash card with funds before you can use Apple Pay Cash to send and receive funds. They can use Apple Pay Cash with any of their other linked debit or credit cards in Apple Wallet.

When the two steps are complete, you can then begin using Apple Pay Cash.

Source: Apple

How does Apple Pay Cash stack up to Venmo?

Apple’s main competition in the P2P space is Venmo. Here’s a breakdown of how Apple Pay Cash stacks up to the leading P2P payments platform.

Where Apple Pay Cash beats Venmo

No need to download an app

Apple Pay Cash is built into Apple’s iOS operating system, so you don’t have to download another app that could take up precious phone memory drain your battery life. To use Venmo on the go, you need to download and set up the Venmo app, which can be a tedious hurdle for some.

Easily change between payment options

You can’t easily switch between payment options in iMessage using Venmo like you can with Apple Pay Cash. The only way to switch payment option is using the Venmo app and changing payment options requires going to Settings, then Banks and Cards, then setting one card or bank account for use in payments to peers. After going through multiple screens to complete that process, you can then pay with the selected payment source.

With Apple Pay Cash, you can switch payment options in your Apple Wallet right in the iMessage app, in the middle of making a transaction.

Apple Pay Cash automatically gives you an in-app card

The Apple Pay Cash card is an interesting addition to the P2P space, as it allows you to automatically access to the funds you receive via Apple Pay Cash. The digital card lives in Apple Wallet and can be used like a gift card to make purchases in physical stores or online at retailers who use Apple Pay.

Source: Apple

Transfer limits

Apple Pay Cash lets you send more money per transaction and on a weekly basis than Venmo does. Apple lets you send up to $3,000 in a single transaction and $10,000 in a seven-day period. Venmo has a $2,000 transaction limit and a seven-day limit of $2,999.99. Venmo users can send or receive up to $4,999.99 in a seven-day period and may not complete more than 30 transactions in a 24-hour period.

Where Venmo has the edge over Apple Pay Cash

Venmo has a wider reach

Venmo offers its same P2P service online at Venmo.com, where you can log in and do everything you do on the Venmo app on your desktop or laptop. Apple Pay Cash is exclusively offered on Apple’s mobile devices. Exclusivity may or may not be a downfall for Apple Pay Cash, as exclusive offerings like iMessage and FaceTime have long set Apple apart from its competitors. Those who own Apple Macbooks or desktop devices can pay for items online using their Apple Wallet but aren’t be able to set up Apple Pay Cash without access to an iPhone or iPod touch. Android users and those who don’t have a mobile iOS device, can’t use Apple Pay Cash.

Venmo might give you a physical debit card

Venmo reportedly sent some users invitations to test out a physical Venmo card over the summer months in 2017. Users who opt ed in didn’t pay a fee to use the card, which pulls funds from the user’s Venmo balance. There is no confirmation of a future rollout of physical-card invites to all users.

Send money from a bank account

You cannot use Apple Pay Cash to send money directly from a bank account, like you can using Venmo and practically any other existing P2P platform. Apple Pay Cash does allow you to send money using linked debit cards, however. Arguably, sending money using a debit card is the same thing as sending money from a bank account, as the funds generally come from the same place.

Where Apple Pay Cash and Venmo are the same

Ask Siri to send

When you ask Siri to send money to a contact, the AI doesn’t automatically send the funds using Apple Pay Cash, but, instead, asks you to select from the options you have that can perform the task. Apple Pay is an option, but so is Venmo, if you have that downloaded.

Pay in Messages app

Way ahead of Apple, Venmo released its in-app iMessage integration back in September 2016 (also when Venmo released its Siri integration). Now, you can do the same thing with Apple Pay Cash.

B-to-C payments

In addition to paying friends and family, Apple Pay lets you pay businesses using Apple Pay Cash. You could technically already use Apple Pay where available in stores and online, but now you can use the balance accrued from received payments or loaded onto an Apple Pay Cash card in Apple Wallet. Venmo users can also complete online transactions to businesses using Venmo, a feature Venmo debuted October 2017.

Cost

There is no cost difference between Venmo and Apple Pay Cash. Both systems charge no fee to send money using a debit card and charge a 3% fee to send money using a credit card. Venmo also doesn’t charge for sending money from a linked bank account. Apple pay Cash doesn’t offer the option to link a bank account.

The bottom line

If you are a loyal Apple user and a late adopter to person-to-person payment systems, Apple Pay Cash could act as a kind nudge into the P2P payments space. In addition, Apple Pay Cash’s iMessage integration and quick setup process make it easy for the less-tech-savvy among us to start sending and receiving funds electronically. On top of that, having an Apple Pay Cash card already in our Apple Wallet makes it easy to spend any money you receive at vendors that accept Apple Pay, without having to wait a day or two for the money to show up in your bank account.

If you’re already a Venmo user, other than Apple Pay Cash’s automatic addition into your Apple devices with the iOS 11.2 update, there’s far less incentive to switch over to Apple Pay Cash. If you like to make your P2P payments and requests on a desktop or want to send funds directly from your bank account, stick with Venmo.

Aside from those features, Venmo and Apple Pay Cash cost the same and are about as simple to use. 

The post How Apple Pay Cash Stacks Up Against Venmo appeared first on MagnifyMoney.

Why That Stroller Strains So Many Parents’ Budgets

Miami mom Stephanie Viney, 28, says she chose a pricey UPPAbaby stroller for its many features and sturdiness. Baby strollers come in a variety of styles and price points, from $20 to more than $1,000. (Photo courtesy of Viney.)

No one needs to tell a new parent that raising a child in America is a pricey endeavor.

New parents can expect to spend about $233,610 on a child’s basic needs through age 17, excluding savings for higher education, according to the U.S. Department of Agriculture.

One of the first purchases you’re likely to make as a new parent is a stroller. When it came time for Brooklyn resident JiaYao Liu, 23, and her baby’s father to buy a stroller for their baby boy, now 3, they walked into Babies R Us expecting to spend about $80-$100. They were sorely mistaken.

“I didn’t expect it to be that expensive until I went and I looked,” Liu says.“You just want to carry your child from Point A to Point B, and there are some strollers with a whole bunch of toys on them, and I don’t think it’s necessary.”

The couple ultimately purchased the most-affordable stroller they could find. Liu says it was a store brand and the practical choice, based on her needs. Still, at around $130, it was a little outside their price range.

New Orleans resident Demetra Pinckney, 29, had a similar experience when she and her husband picked out a stroller for their baby registry.

“They have some strollers that are $500, $600,” Pinckney says. “I’m thinking: ‘Oh my goodness. No, I have to live. They have good strollers that don’t have to cost you a whole paycheck.’”

The stroller she picked out and ultimately received as a gift cost about $400.

Over the past few decades the baby stroller has gone from a practical parenting necessity to a luxury item for some, says Paul Hope, senior home editor at Consumer Reports. While you can still find a budget-friendly stroller, an increasing number of new premium models are priced north of $1,000.

“What I think has happened is that we have really seen the emergence of a lot of premium brands and they have become sort of a status symbol,” says Hope.

Why are baby strollers so expensive?

Marketers and manufacturers have capitalized on a ripe market, says David Katzner, president of The National Parenting Center, a parent advocacy organization, explaining why more high-priced strollers have entered the market. The organization has reviewed parenting products since 1990 and this year reviewed its first $1,300 stroller.

“For parents, our testers, the sticker shock is remarkable,” Katzner tells MagnifyMoney. He says the high prices prompt some parents to jokingly ask if the stroller is magical — for the money, can it educate the children, or even change a diaper?

Some parents are willing to spend top dollar even for products that will only be used until their little ones are able to walk on their own.

Miami mom Stephanie Viney, 28, says an expensive stroller is worth it if you have the money to spend.

When she and her husband were getting ready to have their first child, Finn, now 23 months old, they picked out an upscale traditional stroller: the UPPAbaby Cruz stroller, car seat and accessories totalling $1,100 for their baby registry.

“It is definitely expensive once you get everything you need; what sold me on it was the big, easy-access basket underneath,” says Viney. The stay-at-home mother and hairdresser says the stroller has held up well and is practical for her on-the-go lifestyle. “The UPPAs are sturdy strong strollers. You get what you pay for.”

A year after they received their first stroller, the couple shelled out $1,200 to upgrade to an UPPAbaby Vista stroller, large enough to hold both Finn and his four-month-old baby brother.

What you’re getting for the money

The most expensive strollers may be made with premium materials like leather upholstery, have some extra padding in the seat area, larger wheels that absorb shock, cupholders or extra basket space underneath. Viney’s UPPAbaby Vista even incorporates a “piggyback” attachment, which will allow one child to stand and ride along when they’re big enough. She and her husband are both tall, so she says it helps they can adjust the handlebar up and down, too.

“With very premium priced strollers, you might get premium materials and construction [or] the brand name, but there are very few categories of anything we test where paying more gets you more in the way of reliability or performance or even longevity,” says Hope.

How to make an informed stroller purchase

Even for Katzner, who has been reviewing parenting products for over a decade, navigating the stroller industry is at times “very, very confusing.”

“Worst of all is walking a trade show floor when they are all just filled with all the same product,” says Katzner, whose position requires he often attend trade shows where manufacturers display new strollers, car seats, feeding and nursing systems and other baby products.

“In many cases the person in the booth is struggling to show how their stroller is different from the guy next to them,” he says. “You might find as a parent you are in the exact same place. You might say, ‘what’s the difference?’”

Compare and test drive

A stroller is not an insignificant purchase. You’ll need to purchase one just like you would need to purchase a car seat or any other baby items and you will likely use it for a number of years. With many options to consider, your decision may depend on myriad factors.

Whatever you do, don’t let peer pressure be one of them, says Katzner. He advises parents not to simply choose what’s popular or has the best ratings online.

He recommends parents to some online research, take notes, then go test out strollers in person before they settle on a pick.

If you feel pressured to keep up with your peers, keep in mind, Consumer Reports has not found any reason to buy a stroller that costs more than $1,000, says Hope.

While you’re at the store, try any of these shopping tips to help make your decision.

Consider your lifestyle

Stroller options can be categorized into three main families: traditional, jogger, and umbrella. (Though you can find strollers with mixed features.)

What you ultimately choose will depend on how you plan you use the stroller.

If you are very active and plan to exercise with the stroller or take it along with you on tough terrains, you may want to consider a jogger. On the other hand, if you will need to lift the stroller often, you may choose, instead, an umbrella stroller.

“Umbrella strollers are really fabulous for collapsing on the subway or in transit going to the airport,” Hope says.

After her son turned 2, Liu supplemented her first stroller purchase with a $20 umbrella stroller from Target.

“It was difficult because of the subway stations,” she says of her first stroller. “Every time I had to fold the stroller and carry my bags, my son and his bags up the stairs.”

However, many jogging and umbrella strollers can’t be used with children less than 6 months old, because they don’t always accept car seats. That’s why Liu bought the big, chunky stroller, first. Hope says most people opt for the traditional stroller, as it suits most needs.

“Traditional strollers that accept an infant car seat or are compatible are typically the best value,” says Hope. “You’re guaranteed that the stroller will be safe to use with a baby that is under six months.”

Test for ease of use

Put the stroller through a comprehensive test when you’re shopping to test how easy it is for you to use. After all, you’re the one who will be spending the most time with the stroller. Katzner recommends you choose something that makes your life easier.

Everyone will have different determining factors. In general, Hope suggests shoppers check for how it feels to do things like lift the stroller, strap in the child, adjust the backrest or lock the wheel brakes.

In addition, he advises shoppers to take the stroller for a ride to test how easy it is to navigate. Hope suggests going with a small child if you already have one — or ask a friend or family member if you can take their youngster for a test drive — to simulate real-life situations like making tight turns and encountering curbs.

Liu says her first stroller weighed about 10 to 15 pounds, and she could fold and carry it with one hand when traveling in the city. She says a basket underneath also came in handy when she went out grocery shopping or had her son with her and had to bring along a bunch of his things.

On the other hand, the Pinckneys have a pickup truck, which makes it easy to load and unload a bulkier stroller. They also live in a suburban area, where they are less likely to need to lift or fold the stroller.

Look for the JPMA logo

“There is not a whole lot you can look for as a consumer in the way of safety,” says Hope. But, organizations like the Juvenile Product Manufacturers Association (JPMA) regulate strollers and they test for a whole host of safety factors, so you don’t have to. Look for the JPMA logo on the stroller box to feel confident the stroller you put your baby in meets today’s safety standards.

Some strollers and online retailers like Amazon.com may display the National Parenting Center’s seal of approval, too. The organization has real parents test and review children’s products on many features, so you can get a sense of what it’s like to actually use the stroller. Although the strollers the NPC reviews are generally already JCMA-approved, the organization notes that its seal of approval does not imply or guarantee product safety.

Question the salesperson

The salesperson’s job is to make sales, but your job is to be a responsible consumer. If you get to the store with one stroller in mind, but the salesperson pushes you toward a different pick, ask why, says Katzner.

“Of course the salesman is going to try to sell you the $600 stroller,” says Katzner. “Put them to the test and ask why. What does it do? What’s the difference?”

In the end, you’ll walk out more confident in your choice having asked all your questions, instead of feeling as if you were coerced into choosing a stroller with features you weren’t interested in, or may not ever use.

Think ahead

Hope says most traditional strollers that carry an infant car seat can be used from when the baby is born until they are about four or five years old; traditional strollers commonly adjust to accept a child that weighs up to about 50 to 60 pounds.

If you plan to have more children, you’ll need to do some forward thinking when choosing your first baby stroller. A durable stroller can go a long way. And, as long as safety standards don’t drastically change, it could serve you for more than one child.

When they had their second child, Viney ran into an issue. She now needed a double stroller, but her UPPAbaby Cruz couldn’t be converted into one.

“Once I realized I got the wrong UPPAbaby I was very upset,” Viney says. Because they already had $500 worth of seats and accessories, they decided to stay with the same brand and get a UPPAbaby Vista — the new stroller and a second seat cost about $1,200.

“The sales guy should have definitely asked if we were going to plan for more kids because when spending this kind of money you want to have it for long,” says Viney.

The bottom line: Don’t follow the crowd

Asked if she would have chosen a more expensive stroller, were money no object, Liu says no.

“If at the time I had more money or wasn’t strapped for cash I would have gone with the same thing. It was practical. It was fine. I have no complaints about it,” says Liu.

Pinckney, on the other hand, says she would choose a more expensive stroller if it had features her current stroller is missing like a tray up top, for parents, or cupholders.

It all comes down to personal preference. Choose the stroller that best fits your lifestyle at the best price point for your budget. Most importantly, pick a stroller that will make your life as a parent that much easier.

“Do not go beyond your means,” says Katzner. “Do not get something that is going to be unwieldy and make your life more difficult.”

The post Why That Stroller Strains So Many Parents’ Budgets appeared first on MagnifyMoney.

5 Signs You’re Probably Going to Default on Your Student Loans

A newly released New York Federal Reserve analysis sheds some insight on factors that may determine if student loan borrowers are more or less likely to default on their loans.

According to Fed data, 28% of students who left college between 2010 and 2011 defaulted on their student loans within five years. That’s significantly higher than the students who left school five years earlier, between 2005 and 2006, of which only 19% defaulted within five years.

Defaulting on a student loan is big deal. Not only will someone who defaults on a student loan need to deal with collections calls, but a default can seriously harm a borrower’s credit rating, making it difficult to qualify for a personal loan or other large credit purchases like a new home.

The New York Fed’s analysis highlights factors that could determine default rates years after students leave school. They range from things a student can’t necessarily control —  family background and how selective the college they attended was — to things students may have a little more control over, like the degree and major they pursue.

The data show students in these categories are more likely to default on their student loans between ages 20-33:

  1. Dropped out before earning a degree.
  2. Enrolled in an associate’s degree program.
  3. Majored in arts and humanities.
  4. Attended a for-profit institution, community college or nonselective college.
  5. Came from a low-income family.

A few of the factors relate to things a student has some control over, like the kind of school chosen and the degree pursued. Another big factor, family background, depends more heavily on chance.

Here’s what the Fed found about how the factors influence default rates.

The school

For-profit, public, or nonprofit?

If a student attended a private for-profit two-year institution, their chances of default were highest of all — just above 3% were in default at age 22, shooting up to 42% by age 33. Students at private four-year for-profits weren’t far behind, with a default rate of

38.8% by age 33.

On the other hand, students were much less likely to struggle to repay their student loans at nonprofit institutions, both public and private. Private nonprofit four-year student had the lowest default rate at 17.2%. They were followed by students who attended public nonprofit four-year institutions.

Source: FBNY

Selective vs. nonselective

The Fed’s analysis found students who attended colleges that were more selective or competitive defaulted at lower rates that those who attended less-selective colleges. The analysis used Barron’s Profile of American Colleges to classify colleges into selective and nonselective based on competitiveness.

The degree

Graduate versus dropout

Whether or not a borrower graduated was the second-strongest predictor of default among borrowers, according to the Fed analysis. Overall, students who dropped out had higher rates of default versus borrowers who graduated no matter what kind of degree they attempted. The analysis notes that may be attributed to the fact graduates are more likely to find more gainful employment that would give them the ability to pay off their loans after earning a degree.

Source: FBNY

Associate versus bachelor’s degree

No matter what kind of college a graduate attended, students in a two-year degree programs had higher default rates than their peers who enrolled in a four-year college, according to the New York Fed analysis.

But the gap between default rates of two-year and four-year students was widest among students who attended public schools — 21.4% to 36.5%, respectively— a difference of more than 15 percentage points

STEM versus arts and humanities

Students who majored in arts and humanities defaulted on their loans at the highest rates — 26.3% at nonselective schools, 14.6% at selective schools— while STEM majors at selective schools (12%) and business students at selective schools (11.5%) defaulted at the lowest rates.  Overall, default rates among students who majored in business or a vocational programs were closer to STEM students than to arts and humanities majors.

Arts and humanities majors defaulted at higher rates regardless of the college’s selectivity, but if students majored in STEM, business or a vocational program, selectivity may have factored in more. By age 33, the default gap between students who chose a best-performing major and a worst-performing major was three percentage points at selective colleges, while at nonselective schools the gap was eight percentage points.

Source: FBNY

The student

Advantaged vs nonadvantaged

The Fed’s analysis took a look into defaulters’ income and family background, too. The analysis looked at the average income for the ZIP code area at a borrower’s youngest available age based on available loan data. The analysis defined students who came from households earning below the mean income based on ZIP code as nonadvantaged, and students from households earning above the mean income.

The analysis found borrowers who came from less-advantaged backgrounds based on income had higher default rates no matter what type of college they attended.

Taking both a borrower’s background and college into consideration, the widest gap in default rates observed in the analysis were among advantaged students who attended private nonprofit colleges (13% of whom defaulted by age 33) and nonadvantaged students who attended private for profit colleges (42.1% of whom defaulted by age 33).

Source: FBNY

The post 5 Signs You’re Probably Going to Default on Your Student Loans appeared first on MagnifyMoney.

4 Ways the House Tax Bill Could Affect College Affordability

Congress is working around the clock to get a new tax bill to President Trump’s desk before the year is out. In addition to a host of tax cuts, both the Senate and House GOP tax plans include several proposals that could make saving and paying for higher education more costly for families. Considering Americans hold a collective $1.36 trillion in student loan debt and 11.2 percent of that balance is either delinquent or in default that’s not-so-good news for millions of Americans.

Both plans  include proposed ideas that could impact how students and families finance higher education. The House plan, for instance, includes proposed provisions that would affect the benefits parents, students and school employees like graduate students receive, which could ultimately impact the price students pay.

In a Nov. 6 letter to the House Ways and Means Committee opposing the provisions, the American Council on Education and 50 other higher education associations states that  “the committee’s summary of the bill showed that its provisions would increase the cost to students attending college by more than $65 billion between 2018 and 2027.” They reaffirmed their opposition in a Nov. 15 letter.

The council and other higher education associations weren’t satisfied with the Senate’s version of the Tax Cuts and Jobs Act, either. In a Nov. 14 letter, the council says it’s pleased the Senate bill retains some student benefits eliminated in the House version, but remains concerned about other positions that it says would ultimately make attaining a college education more expensive and “erode the financial stability of public and private, two-year and four-year colleges and universities.”

Where are the bills now?

Updated: U.S. senators voted 51-49, to pass a revised, 479-page version of the Tax Cuts and Jobs Act in an early morning vote Dec. 2. The vote was almost entirely along party lines. Only one Republican senator, Bob Corker (Tenn.), voted against the tax bill, citing concerns about adding to the federal deficit. No Democrats backed the bill. Analysis of the bill as-passed is ongoing. However, the Joint Committee on Taxation posted its most-recent analysis of the Tax Cuts and Jobs Act to its Twitter account just after the bill’s passing Saturday.

The House version of the Tax Cuts and Jobs Act passed by a 227-205 vote on Nov. 16, just before the chamber’s Thanksgiving holiday. No Democrats backed the bill. The two chambers will now need to hash out many differences between the proposed tax plans before sending legislation to the president’s desk by year’s end.

In its plan, the Senate committee says the goal of tax reform in relation to education is to simplify education tax benefits. MagnifyMoney took a look at a few of the major proposed changes to the tax code that would impact college affordability most.

Streamline tax credits

The House tax bill proposes to repeal the Hope Scholarship Credit and Lifetime Learning Credit while slightly expanding the American Opportunity Tax Credit. The new American Opportunity Tax Credit (AOTC) would credit the first $2,000 of higher education expenses (like tuition, fees and course materials) and offer a 25 percent tax credit for the next $2,000 of higher education expenses. That’s the same as it is now, with one addition: The new AOTC also offers a maximum $500 credit for fifth-year students.

The bigger change is the elimination of the other credits. Currently, if students don’t elect the American Opportunity Tax Credit, they can instead claim the Hope Scholarship Credit for expenses up to $1,500 credit applied to tuition and fees during the first two years of education; or, they may choose the Lifetime Learning Credit that awards up to 20 percent of the first $10,000 of qualified education expenses for an unlimited number of years.

Basically, in creating the new American Opportunity Tax Credit, the House bill eliminates the tax benefit for nontraditional, part-time, or graduate students who may spend longer than five years in the pursuit of a higher-ed degree. According to the Joint Committee on Taxation, consolidating the AOTC would increase tax revenue by $17.5 billion from 2018 to 2027, and increase spending by $0.2 billion over the same period.

The Senate bill does not change any of these credits.

Make tuition reductions taxable

The House bill proposes eliminating a tax exclusion for qualified tuition reductions, which allows college and university employees who receive discounted tuition to omit the reduction from their taxable income.

A repeal would generally increase the taxable income for many campus employees. Most notably, eliminating the exclusion would negatively impact graduate students students who, under the House’s proposed tax bill, would have any waived tuition added to their taxable income.

Many graduate students receive a stipend in exchange for work done for the university, like teaching courses or working on research projects. The stipend offsets student’s overall cost of attendance and may be worth tens of thousands of dollars. As part of the package, many students see all or part of their tuition waived.

Students already pay taxes on the stipend. Under the House tax plan, students would have to report the waived tuition as income, too, although they never actually see the funds. Since a year’s worth of a graduate education can cost tens of thousands of dollars, the addition could move the student up into higher tax brackets and significantly increase the amount of income tax they have to pay.

The Senate bill doesn’t alter the exclusion.

Eliminate the student loan interest deduction

Under the House tax bill, students who made payments on their federal or private student loans during the tax year would no longer be able to deduct interest they paid on the loans.

Current tax code allows those repaying student loans to deduct up to $2,500 of student loan interest paid each year. To claim the deduction, a taxpayer cannot earn more than $80,000 ($160,00 for married couples filing jointly). The deduction is reduced based on income for earners above $65,000, up to an $80,000 limit. (The phaseout is between $130,000 and $160,000 who are married and filing joint returns.)

Nearly 12 million Americans were spared paying an average $1,068 when they were credited with the deduction in 2014, according to the Center for American Progress, an independent nonpartisan policy institute. If a student turns to student loans or other expensive borrowing options to make up for the deduction, he or she could  experience more financial strain after graduation.

The Senate tax bill retains the student loan interest deduction.

Repeal the tax exclusion for employer-provided educational assistance

Some employers provide workers educational assistance to help deflect the cost of earning a degree or completing continuing education courses at the undergraduate or graduate level. Currently, Americans receiving such assistance are able to exclude up to $5,250 of it from their taxable income.

Under the House tax plan, the education-related funds employees receive would be taxed as income, increasing the amount some would pay in taxes if they enroll in such a program.

A spokesperson for American Student Assistance says if the final tax bill includes the repeal, it may point to a bleak future for the spread of student loan repayment assistance benefits, currently offered by only 4 percent of American companies.

Take care not to confuse education assistance with another, growing employer benefit: student loan repayment assistance. The student loan repayment benefit is new and structured differently from company to company, but generally, it grants some employees money to help repay their student loans.

The Senate plan does not repeal the employer-provided educational assistance exclusion.

The post 4 Ways the House Tax Bill Could Affect College Affordability appeared first on MagnifyMoney.

Senate Tax Reform vs. House Tax Reform

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Update: The Senate passed a revised, 479-page version of the Tax Cuts and Jobs Act in an early morning vote Dec. 2. Senators voted 51-49, to pass the $1.5 trillion Senate GOP tax bill at 1:51am, according to The Hill. The vote was mostly along party lines. Only one Republican senator, Bob Corker (Tenn.), voted against the bill, citing concerns about adding to the federal deficit. No Democrats backed the bill.

Analysis of the Senate tax bill as it was passed is still pending. However, the Joint Committee on Taxation posted its most-recent analysis of the Tax Cuts and Jobs Act to its Twitter account just after the bill’s passing Saturday.

The House version of the tax bill passed by a 227-205 vote chamber vote, just before the chamber’s Thanksgiving holiday. No Democrats backed the House tax bill, either.

The two chambers will now need to hash out many differences between the proposed tax plans before sending legislation to the president’s desk by year’s end.

From the looks of it, the Senate isn’t exactly on the same page with their colleagues in the House of Representatives. The plan bears the same name as the House’s bill, but the Senate’s version of the Tax Cut and Jobs Act diverges from the House’s plan on a number of individual and business tax reforms.

Most notably, the proposed Senate Republican plan would delay cutting the corporate tax rate by one year, include more tax brackets than the House plan and retain the mortgage interest deduction, among a few other popular tax breaks.

The bills do share some things in common. For example, neither version calls for any changes in workers’ 401(k) tax contribution limits. And both tax plans would repeal the alternative minimum tax and maintain the charitable contribution deduction. Both plans also repeal personal exemptions, but double the standard income tax deduction for individuals, married couples and single parents.

Complying with a Senate rule known as the Byrd rule is an issue. Under that rule, during the legislative reconciliation process, senators can move to block legislation if, among other reasons, it would possibly mean a significant increase in the federal deficit beyond a 10-year term.

If the Senate is able to pass its tax bill, the differences between the two plans may lead to clashes over tax policy as a pressured Congress tries to get a single tax reform bill to President Donald Trump’s desk by Christmas.

Here is a quick breakdown of the major differences between the two plans. Read beyond the table for further detail.

Income tax brackets

The Senate’s plan maintains the tax system’s seven tax brackets—10%, 12%, 22.5%, 25%, 32.5%, 35% and 38.5% — as opposed to the House’s four. The senate plan notably maintains the lowest tax rate at 10 percent and modifies all but one other. The proposal also adjusts qualifying income levels.

The Senate plan would reduce the income tax on the nation’s highest earners to 38.5% from the current 39.6%. Individuals and heads of households earning more than $500,000, and married couples earning more than $1 million would pay the highest rate. The proposed income thresholds for the Senate’s plan are pictured below.

Alternatively, the House bill proposes four income brackets of 12%, 25%, 35%, and 39.6%.

The state and local tax deduction

The Senate plan fully eliminates the State and Local Tax, or SALT, deduction. Nearly one third of Americans took the deduction in 2015, according to the Tax Policy Center, so the repeal is likely to ruffle some feathers. While the House tax plan reduced deductions for state and local taxes, it still allowed Americans to deduct up to $10,000 in property taxes. The senate plan would completely get rid of the SALT deduction, including the deduction for property taxes.

Some critics fear eliminating the SALT deduction would disproportionately affect earners in states with high taxes, like New York and California. Across the nation, just six states— California, New York, New Jersey, Illinois, Texas, and Pennsylvania— comprised more than half of the value of all state and local tax deduction claims in 2014.

The mortgage interest deduction

Nothing would change under the Senate’s plan. Americans would still be able to deduct the amount of interest paid on up to the first $1 million of mortgage debt under the Senate tax plan. The House tax plan, on the other hand, had proposed to lower the threshold for the mortgage interest deduction to $500,000.

Only about six percent of new homes are valued at more than $500,000, according to an August 2017 report by the United for Homes campaign. The group argues lowering the cap would have “virtually no effect on homeownership rates.”

Corporate tax rate

The Senate plan still reduces the corporate tax rate from 35% to 20%, but corporations won’t get a break until 2019, when the Senate plan phases in the reduction. On the other hand, the House Plan would have initiated the reduced rate in 2018.

The decision to phase in the cut was likely made because a delayed corporate tax cut would make it easier for the Senate to reach its goal of passing a tax bill that does not increase the deficit by more than $1.5 trillion over the next decade.

The estate tax

The estate tax exemption is doubled from $5.49 million in assets ($10.98 million for married couples) onto heirs under both the Senate and House bills.

The House plan doesn’t get rid of the estate tax immediately. The House’s proposal also doubles the exclusion amount to $10 million, but eliminates the estate tax after 2023. The estate tax affects only the estates of the wealthiest 0.2 percent of Americans, according to the Center of Budget and Policy Priorities.

Adoption and child tax credits

Unlike the initial House tax plan, the Senate plan proposes keep some popular tax breaks. The plan proposes to retain the Adoption Tax Credit, which allows families to receive a tax credit for all qualifying adoption expenses up to $13,570. The Senate plan also slightly bumps up a proposed child tax credit compared to the House plan. While the House plan increased the credit from $1000 to $1600, the Senate plan proposes raising the credit slightly more, to $1650.

Student loan interest and medical expenses deduction

Under Senate plan, students will still be able to deduct interest paid on student loans up to $2500. Furthermore, taxpayers would still be able to claim medical expenses as a deduction if they account for over 7.5 or 10% of their income. This is a departure from the House plan, which would have eliminated both.

Pass through business

The Senate tax plan establishes a 17.4 percent deduction for pass through businesses like sole proprietorships, S corporations, and partnerships.The HIll reports the deduction would lower the effective tax rate on the highest earning small businesses to just over 30 percent, according to a Senate Finance aide. The deduction would only apply to service businesses based in the U.S

The House plan establishes a 25 percent tax rate for pass-through companies. But only 30 percent of the business’s revenue is subject to that rate. The remaining 70 percent would be taxed at the individual tax rate. The House amended the bill Thursday to create a new 9 percent tax rate for the first $75,000 of income of a married active owner with less than $150,000 of pass-through income.

What’s next for GOP tax reform?

The future is unclear for either proposed tax plan. The two chambers will likely need to compromise over differences in the coming weeks to get a bill passed and to the President’s desk by year’s end.

Thursday’s news came just as the House Ways and Means Committee finalized its own bill after announcing two amendments, with a vote expected next week.

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Car Prices Hit an All-Time High — Here’s How to Save When Buying New

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The first Model-T cost as little as $825 in 1908, which is about $18,000 adjusted for inflation. Today, the average car buyer can expect to leave a dealership with a new car for around $35,428. That was the average transaction price for a new vehicle in October — an all-time high — according to auto comparison website Edmunds.com.

The average new-vehicle transaction rose 2 percent from October 2016 and 12 percent over the past five years. The average down payment on a new car also hit a new record: $3,966, which is up $374 from last year and $454 from five years ago.

Why are prices up?

The increase is due in part to a rise in the number of features that come standard with a new car these days, like automatic emergency braking and backup cameras, says Ronald Montoya, senior consumer advice editor for Edmunds. In addition, consumers are moving away from lower-cost, smaller sedans, climbing into higher-priced, larger SUVs and trucks.

Montoya says the general decline in overall gas prices since 2008 is partly responsible for the shift in consumer preferences. Plus, many shoppers favor a higher driving position and having more storage space.

Before we get to how you can find savings on a new car despite the higher price tags, let’s talk about a savings strategy that can backfire.

Looking beyond your monthly payment

Many are opting for longer auto loans to cope with rising car prices, says Matt DeLorenzo, managing editor for kbb.com, the website for vehicle research publisher Kelley Blue Book. Recently, the Consumer Financial Protection Bureau (CFPB) found that 42 percent of auto loans made in the last year were for six-year terms or longer, up from 26 percent in 2009.

Taking out a longer auto loan to pay a lower monthly price isn’t an ideal hack, DeLorenzo tells MagnifyMoney. While a longer term keeps your monthly payments lower, you end up paying more in interest over the life of the loan than you would with a shorter-term product. That makes your new car even pricier, so avoid taking out a longer loan to squeeze an expensive vehicle into your budget..

The CFPB found that six-year auto loans cost more in interest over time, are used by consumers with lower credit scores to finance larger amounts, and have higher rates of default. Here’s a good rule of thumb to keep in mind when you’re reviewing financing options: If you are unable to afford financing an auto purchase over four years, perhaps it’s out of your price range.

DeLorenzo says going with a longer loan is one of two actions people are taking in response to higher prices. The other: leasing.

It is true that leasing a vehicle saves you money on monthly payments in the short run, but there’s more to this financial story. Indeed, if you drive a lot of miles, leasing may be a bad idea. You may be hit with extra mileage and wear-and-tear charges at the end of your lease.

How to save on a new car

So prices are at record highs. The experts we talked to say there are still ways you can save when buying a new vehicle in this market.

Try a compact vehicle

If you’re shopping for a car in 2017, you’re likely looking at a crossover, midsize vehicle or truck. Those larger vehicles are in demand right now, and, according to Edmunds, the shift to the larger vehicles has driven interest rates and prices up. However, automakers are struggling to move less-popular 2017 models like compact sedans off dealership lots.

DeLorenzo, the KBB editor, recommends purchasing a less-in-demand sedan or crossover vehicle to find savings.

Many new compact cars may be sold for up to $10,000 less than a larger SUV or truck by the same manufacturer, he says. By choosing a sedan or other compact vehicle, you trade size for better fuel economy and a more affordable car.

And because dealers are having a hard time selling these models, you might see better discounts, more incentives and improved lease deals on more traditional sedans and family cars, according to DeLorenzo.

Pair a lower down payment with GAP insurance

Common savings advice for car shoppers includes making a down payment of at least 20 percent of the vehicle’s transaction price. This tactic is intended to save you money right away, as a new car loses about 20 percent of its value in its first year of ownership, according to Montoya.

People are putting down closer to 12 percent of the vehicle’s value at signing because it’s tough to save up 20 percent since vehicle prices have gotten more expensive, Montoya tells MagnifyMoney. He says most people tend to go with making a down payment that results in a monthly payment they are comfortable with.

But, since a new vehicle loses about a fifth of its value in its first year of ownership, “if you put down payment of 12 percent, you are already in the red,” Montoya adds. He says you may want to look at GAP insurance if you put down less than 20 percent.

Services like GAP — Guaranteed Auto Protection — insurance and new car replacement insurance will cover the difference between what the vehicle is worth and what is owed on the loan in the event of total loss or accident.

Ask your insurance company if it offers new car replacement insurance or GAP insurance. If your insurance doesn’t offer new car replacement or the monthly cost of the insurance is outside of your budget, Montoya says to consider getting GAP insurance from the dealership.

Adding GAP insurance may tack on another monthly transportation cost, but it can save you from possibly owing thousands on an upside down auto loan in the event you have an accident and lose your vehicle.

On the downside, GAP insurance coverage may vary from insurer to insurer, so be sure to ask what the insurance can apply to. Some policies, for example, may cover collisions but not flooding or theft.

Look out for incentives

A little research can go a long way when you’re car shopping. Keep an eye out for extra savings in the form of incentives from both the dealer and the manufacturer.

Both Montoya and DeLorenzo recommend checking the manufacturer’s website or comparison websites like KelleyBlueBook.com or Edmunds.com for savings before you set foot on a dealer’s lot.

There may be special incentives you qualify for based on your status as a veteran, student or ride-share driver. You may also find a loyalty incentive, reserved for those who already own a car by the same manufacturer, or a conquest incentive, offered to customers willing to trade in a competing brand.

Be sure to enter your ZIP code to find incentives most relevant to you at local dealerships, and to search based on the exact model you’re looking for.

Even if you think you’ve found all you could dig up, you may discover additional savings if you ask the salesperson about any deals or promotional offers the dealer may be running when you come in. Wait until you’re at the negotiating table to bring the deal up, advises DeLorenzo.

“Keep that in your back pocket,” he says. “If they don’t offer them to you. then bring them up.”

Get preapproved for financing

You don’t have to leave the financing to the dealer, and you shouldn’t if you want to ensure you’re getting a good deal. Get preapproved for financing before you show up at a dealership. That way, if the dealership offers you financing at a higher interest rate, you can counter the offer or, at the very least, have a benchmark for offer comparisons. Naturally, you should aim to finance your new vehicle at the lowest interest rate possible.

Compare prices

The first step to saving money on anything is shopping around. Compare prices of the vehicle you want across multiple dealers.

“A lot of people tend to go to the dealership that’s closest to them and they don’t shop around,” says Montoya. He recommends going to at least three different dealerships. “You’ll see three different offers and you’ll get a better idea as far as price,” he says.

Websites like Kelley Blue Book, TrueCar and Edmunds make it fast and simple to compare prices of new and used vehicles online. Use the sites to compare sticker prices before you head out to the dealership. Beyond the physical vehicle, take the time to compare what you can expect to pay for must-haves like auto insurance and vehicle maintenance, as they can fluctuate depending on the vehicle you choose.

Time your purchase just right

Simply walking onto the a dealer’s lot at the right time of the year can save you a chunk of cash. Montoya says the holiday season is a good time to shop for a new vehicle; dealers are looking to clear out their inventory of the outgoing year’s models to make room for new vehicles.

“Look at vehicles on the outgoing year,” says Montoya. “They will have more discounts and there is more incentive for dealers to sell those models.”

You also want to pay attention to when the vehicle came out. The longer a car is out, the more likely it is to have more discounts than newer models, adds Montoya. He recommends going back a model year to save money if you don’t mind getting a used car instead of a new one.

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Why You Should Know About Jerome Powell, Tapped as the Next Fed Chair

After much speculation, President Trump this month nominated Jerome H. Powell, 64, to be the next chairman of the Federal Reserve. Powell, nominated on Nov. 2,  is now next in line for what many consider the second-most-powerful position in the United States government, after the president himself.

If confirmed by the Senate, Powell will replace Janet L. Yellen, 71, who has been chairing the Fed for the last four years. Her term expires Feb 3. The appointment would make Yellen, who was the first female chairman of the federal bank, also the first serving Fed chair in nearly 40 years who was not reappointed by a new president for another term. The last time a first-term president removed the serving Federal Reserve chair was in 1978.

What does the chair do, anyway?

The Federal Reserve chair is the head of the Federal Reserve System, aka the central bank of the United States. The bank is in charge of things like conducting monetary policy in order to promote employment, keep inflation under control and moderate long-term interest rates — all of this in an effort to keep our financial system functional and stable.

Fed chairs serve four-year terms and are nominated by the president. If approved as chair, Powell will be in charge of carrying out the Fed mandate. The chair reports twice a year to Congress to testify on the Fed’s monetary policy and objectives. The chair also meets regularly with the Secretary of the Treasury Department, a member of the President’s cabinet. The chair’s actions influence employment, prices and interest rates.

Here’s another responsibility: The Fed chair is also the chair of the Federal Open Market Committee, which sets the federal funds rate. The funds rate is the benchmark interest rate for the nation, and when the funds rate rises, interest rates on short-term borrowing options like credit cards and personal loans tend to rise, too. For a complete primer on the fed funds rate and how it impacts your wallet, check out this explainer from our parent company, LendingTree.

For seven years following the 2008 financial crisis, the Fed held the funds rate  near zero to help curb inflation and encourage lending during the nation’s recovery. Then, in December 2015 the Fed raised the rate to between 0.25 and 0.50 percent. Since, the Fed has voted to raise interest rates four times as the economy has picked back up. The federal funds rate is now 1.25 percent, as Fed officials voted in June 2017 to again raise rates.

Who is Jerome H. Powell?

Jerome H. Powell is a current member of the Federal Reserve System’s Board of Governors. Powell, a Republican, was appointed to the position by former President Barack Obama, himself a Democrat, in 2012, and his current term was set to end in 2028.

Powell, though not an economist, has a rich background in financial markets. Prior to his appointment, Powell was a visiting scholar at the Bipartisan Policy Center in Washington, D.C. He also served in the George H.W. Bush administration as an assistant secretary and as under secretary of the Treasury.

Between his stints in Washington,  Powell led a career as a lawyer and investment banker in New York City. Powell served as a partner at The Carlyle Group from 1997 to 2005. He will be among the richest people to ever lead the central bank, according to The Washington Post.

According to The Wall Street Journal, White House officials say Trump chose Powell because he liked his combination of monetary policy acumen and business savvy. The president cited Powell’s “real-world perspective” as a positive trait, saying “he understands what it takes for our economy to grow.”

What we can expect from Powell as Fed chair

Powell is reported to be a centrist when it comes to monetary policy. Which is to say that as the next chair of the Federal Reserve System, hel is expected to stick to Yellen’s methodical approach to unwinding financial stimulus policies aimed at continuing recovery from the Great Recession.

Powell voted in favor of every policy decision made by the Board of Governors since he joined the Fed in May 2012. That includes all four federal funds rate increases. He also supported the Fed’s decision in June to begin reducing a $4.2 trillion balance sheet mainly consisting of U.S. Treasury and mortgage-backed securities purchased to lower long-term rates in recovery. Selling the securities takes money out of the market, driving down interest rates and inflation.

Investors expect Powell to keep the FOMC making quarter-percent raises through 2020. According to The New York Times, a survey of 144 investors conducted by Evercore ISI found investors expected that Powell would push rates modestly higher over time than Yellen. He is expected to conduct monetary policy so similarly, some are even referring to Powell as the ‘Republican Yellen.’

The one area where Powell may diverge from a Yellen-like monetary policy is in financial regulation.

The Fed is one of several federal agencies charged with regulating and supervising financial institutions. The Fed-enforced reforms in the wake of the Great Recession , often defended by Yellen, including new financial rules under the 2010 Dodd-Frank law.

“There is certainly a role for regulation, but regulation should always take into account the impact that it has on markets — a balance that must be constantly weighed. More regulation is not the best answer to every problem,” Powell said at an October meeting of the Fed-sponsored private-sector Treasury Market Practices Group.

Trump has stated several times that he he’s in favor of looser financial industry regulation, and the Trump administration further expressed the sentiment when it released plans calling for significant reductions in regulation in June. Just after the plans were released, Powell made clear he didn’t fully agree with the Trump administration’s plans at an appearance before the Senate Banking Committee, according to The Times.

Although Powell acknowledged there were some ideas he would not support, he said there were some ideas that would “enable us to reduce the cost of regulation without affecting safety and soundness.”

The post Why You Should Know About Jerome Powell, Tapped as the Next Fed Chair appeared first on MagnifyMoney.

What Happens When You Miss a Credit Card Payment

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Your phone rings — and rings, and rings some more. You know who’s calling. You know what the caller wants, too, but you can’t afford to give the money you owe on your credit cards. So, you let the debt collector leave a voicemail you have no intention of returning.

That’s the wrong way to deal with delinquent credit card debt, says Michaela Harper, debt counselor and director of the Community Education for Credit Advisors Foundation in Omaha, Neb.

“Don’t be afraid to talk to your creditor,” says Harper. “Avoiding them makes the problem worse because it sends it onto the next division” and brings your debt closer to being charged-off, which Harper says consumers with past-due debt should do their best to avoid. (More on that later.)

Credit card debts — or most debts for that matter — become delinquent the moment you miss a first payment. The events that follow the missed payment depend on how long the past-due debt goes unpaid. It begins with friendly reminder calls from the bank to pay your credit card bill, and can culminate in losing up to 25 percent of your annual income to wage garnishment.

The portion of consumers missing credit card payments has been on the rise since the lowest levels of delinquent credit card debt ever recorded were reached two years ago. About 2.47 percent of credit card loans made by commercial banks were delinquent in the second quarter of 2017, according to Aug. 23 figures from the Federal Reserve Economic Database.

Below is a timeline chronicling what happens when you miss a credit card payment, as well as tips from debt management experts on what you can do to mitigate the situation at each point. (You can jump to a specific time period by clicking on the milestones below.)

Zero to 30 days past due: Missed a payment

After you miss your first payment, your debt is delinquent and the clock starts ticking. Your bank should begin to contact you to remind you to make a payment. You are also likely to incur a late fee.

The first 30 days will sound more like courtesy calls, says Randy Williams, president and CEO of A Debt Coach. In reality, the bank is trying to verify your address and personal information to update the system in case your debt becomes more delinquent. (Williams used to work as a bill collector before switching over to debt consulting.)

What you can do

At this point, the bank’s agents may be more willing to provide customer service, so you can ask for an extension or create a payment arrangement to address the past-due debt before the missed payment begins to impact your credit report, which can be as early as 30 days past due. You may also try your luck at asking if the bank could waive any late fees already incurred, although the creditor is not obligated to extend this courtesy.

There’s only so much leeway a bank will give you, says Gordon Oliver, a certified debt management professional at Cambridge Credit Counseling. If you’ve asked for a late payment or interest charge to be waived in the past, you won’t have much leverage.

“There will be different reasons why a creditor may not extend those benefits at the time, but usually those terms are for borrowers who are in better standing,” Oliver adds.

30 to 90 days past due: Collection calls begin

Over the 30- to 60-day delinquency period, the bank will attempt to reach you to collect the past-due amount on your credit card bill.

“This is when they are trying to figure out what’s wrong. They are trying to collect the money,” says Williams.

“At this point it’s starting to affect your credit,” says Williams. He says the robo-collection calls may come as often as every 15 minutes. Borrowers with higher credit scores are likely to see a bigger drop than borrowers with lower scores. According to FICO data, for example, a 30-day late payment could bring a 680 credit score down 10 to 30 points and a 780 score down 25 to 45 points.

In addition to seeing your credit score drop, you will be charged late fees on the past-due account. After you have owed debt for two payment cycles, the CARD Act allows creditors to flag you in their system as a “high-risk” borrower, which means the interest you currently pay will rise to whatever the bank charges for customers at a high-risk status. That number varies from bank to bank but in some cases can get as high as 29.99 percent. The rate will stay that high at least until you have made six consecutive on-time payments, at which point the bank is required by law to reset the rate.

However, “the law doesn’t say they have to do it on their own,” says Harper. So, you will likely need to request a reset. You can find the APR charged to high-risk borrowers in your credit card terms.

What you can do

Harper says if you respond at this point, the bank may ask you to negotiate a payment arrangement.

“Never make a promise to pay that you can’t keep just to get someone off the phone,” says Harper. “If you are silent, you agree to the payment.”

Missing promised payments also gives the bank more leverage if the bill eventually goes to court, says Harper. “If they walk into court and they can point to all of the promised payments, it undermines your credibility.”

Harper advises debtors to be very clear if they cannot meet the bank’s proposed payment arrangements. You need to specifically tell them you cannot make the payments. If possible, take a look at your budget. If you find you are able to send them a small amount every month, tell them.

“That’s a valuable thing because it goes back to when the account charges off. You can slow down your progression toward charge-off by making the partial payments,” says Harper.

A charge-off happens when a creditor believes there is no chance of collecting your past-due debt, so the debt’s considered a loss. The debt gets written off the creditor’s financial statements as a bad debt and sold or transferred to a third-party collection agency or a debt buyer.

“If they feel like it’s a tough situation [you] are going through they will refer [you] to a credit counselor” around the 60- to 90-day mark, says Williams. Again, that benefit may not be extended to all consumers facing financial hardship.

90 to 120 days past due: Bank requests balance in full

After your bill is 90 days overdue, the bank will turn collection over to its internal recovery department to engage in more aggressive collection attempts. Williams says the bank will now be calling for the balance in full, not only the past-due amount.

The bank’s collectors will continue to call, but they may also send you multiple letters every day, or may attempt to reach you via social media, emails or emergency contacts.

Harper says the account may stay with the bank’s internal collections for another 90 days (180 days past due), but it’s important to note that at the 120-day past-due mark, your debt is at risk of getting charged off and being sold to a third-party collection agency.

That’s because the CARD Act states the past-due amount needs to be the equivalent of six months’ worth of your credit card’s minimum payment in order for the debt to be charged off. Including late fees and the amount added in higher interest payments, consumers may reach that figure in as little as four calendar months.

What you can do

If you can’t give them the entire past-due amount or balance in full, take a serious look at your budget. See if there is any room to make even a small payment. If you can find a few dollars, you may be able to enter a repayment plan with the bank, which will at least pause the collection calls. Don’t forget to leverage the collector’s insider knowledge. Explain your situation and ask if you can negotiate a solution with the bank.

“You want to pay off the debt, they want to pay off the debt. They may have solutions they can offer you that you don’t know about,” says Harper.

Once you’ve got an active repayment plan in place, the bank will pull you out of the collection list, Harper says.

120 to 150 days past due: Hardcore collection attempts

Watch your credit report carefully after your account becomes 120 days past due, as it may be charged off at any point. At this point, the collectors will continue to try every channel available to them to get in touch with you and collect on the debt. The attempts may get closer together and collectors may try more aggressive tactics to scare you into paying up.

“One hundred and twenty to 150 days, it is hardcore. Now they are going to offer you a settlement. They will do whatever they want to try and get to you to pay the debt off. It’s basically motivation to get you to pay now,” says Williams.

Debt collectors at this point may also take time to remind you of your rights under the CARD Act and Fair Debt Collection Practices Act as well as their right to collect on the past-due debt.

The bank’s collectors may not directly say they will proceed with legal action or wage garnishment if they do not intend to, as that is illegal under the FDCPA, but they may remind you of those possibilities if you do not pay and emphasize the bank’s right to collect on the debt owed to them, Williams says.

Williams adds, “They never say they are going to sue you; they say, ‘We have the right to protect our asset.’”

What you can do

Williams says at this point the debtor essentially has three options. Bring the account current by paying the entire past-due amount, arrange a debt settlement plan with the bank or try going to a credit counselor to create a debt consolidation plan.

“Near 120 days past due, they need to get some form of help to remedy the account before it goes to a charge off,” says Oliver, who adds that the timing the charge off will be difficult to predict.

For those who may be behind on several bills, Oliver also recommends getting some form of financial counseling to create a plan that addresses all your financial issues.

150 to 180 days past due: Last chance

At 150 days, collections efforts will remain aggressive and may even increase in frequency as the bank is now concerned about losing the debt to a charge-off.

Once your credit card payment is 150 days past due, you may start to hear the bank’s agents’ tactics shift as they may make a last-ditch effort to recover the debt, according to Williams.

What you can do

You will still have the options to pay the balance in full or reach a settlement with the bank, but you may have an additional option: Re-age your debt.

When your account is past due and you enter a re-age program, the late payments and collection activity are removed from your account. As a result, “your credit score may improve by 10 to 15 points if not growing every month from there,” according to Williams.

You will generally be asked to make at least three on-time payments on the debt before your account is re-aged. For example, the bank could ask you to pay $100 each month for three months before bringing your account back up to a current standing, but the bank will add the interest and fees you’ve already incurred to the total amount you owe. After the account is re-aged, you’ll go back to making minimum payments on the total amount of debt outstanding. Re-aging the account may also remove the “high-risk” stain from the account so your interest rate drops to to whatever it was before.

Williams says a re-age can be seen as a win-win for both parties: You are able to catch up on your delinquent debt and — in some cases — have its impact removed from your credit report, and the bank is able to recover the interest and fees that have accumulated since your account became delinquent.

Of course, the credit card company doesn’t have to allow you to re-age the debt and may not offer the option to you, but there is a possibility it will do so if you ask. Keep in mind you are only allowed to re-age an account once in 12 months and twice within five years, per federal policy, and re-aging is only an option on accounts that have been open for nine months or longer. Credit card issuers are allowed to set more strict re-aging rules for its accounts, as well.

After 180 days: Charged off to a third party

When you are about six months past due, it is extremely likely the bank will charge off your account and sell the debt to a third-party collection agency. If the bank does not charge off your account, it may take the matter to court.

If it goes to collection, third-party debt collectors may employ some of the same tactics the bank’s collectors did. Most collection agencies will push hard for the first 90 days, then at the end of that point in time they may decide to sue you, Harper says. Or they may sell your debt to another collections agency.

The third-party collectors will attempt to contact you using every channel available to them for the next 90 days or so, before they must decide to either charge off the debt or sue you. The collectors will likely demand you pay the full balance or ask you pay the balance in thirds, says Harper. If they can’t get a hold of you or get you to arrange a payment plan in that time, they may decide to turn it over to an attorney.

What you can do

You should try the same tactics that you would have used with the bank’s internal collections agency with the third-party agency, negotiating the price down and reaching a settlement with the third-party collector. If you don’t respond to the collection requests, you may be sued.

You may not be sued for some time. Companies can only sue you for unpaid debts within a certain period of time, called a statute of limitations — anywhere within three to 10 years, according to your state’s law. Your debt may be sold and resold several times before that happens. Check with the office of consumer protection at your state’s attorney general to find out what the rules are in your state.

If you are served with a lawsuit, you should check the letterhead to make sure the attorney or company filing the suit on behalf of the collections agency is licensed to practice law in your jurisdiction, says Harper, as you cannot legally be sued for credit card debt by an attorney outside your jurisdiction.

You should also be sure to respond to the lawsuit. If you don’t, you’ll likely lose. The court can automatically side with the lender if you don’t show up in court, also known as a default judgment. That may result in getting your wages or federal benefits garnished to pay the debt, not to mention the credit damage a judgment causes. Federal law states a creditor can garnish no more than 25 percent of your disposable income, or the amount that your income exceeds 30 times the federal minimum wage, whichever is less.

If you can’t afford to settle

If, given your current financial situation, the debt is unmanageable for you and you are not able to settle the account, you may want to consider bankruptcy. But you will have to file before a judgment is entered against you in court, which may be tricky to time, Harper says.

Given the difficulty in timing when the creditor will take your account to suit, you shouldn’t wait if you think bankruptcy is an option for you. Read here for more information on how and when to file for bankruptcy.

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