How do you manage your money? Investments? Do you remember what your roommate owes you, or what you owe someone else for lunch when they picked up the tab? Can't keep track of where you're spending all your money? Pulling your hair out after paying for your medical bills? Need to cut back, so that you can save and find a nice home? Or maybe you'd rather spend your lucre on a vacation for the best price.

The smart way to money management, personal finance, and investing is to use the right tools — tools that aren't so intimidating that you'll ignore them after a while. This guide to the top 25 web 2.0 applications should help you with the above will come in handy when it comes to managing all your money concerns. [If you're not familiar with "web 2.0", read: what is web 2.0, or the compact definition.] Many of these apps have a community nature to them, so if you need some friendly advice from members, or wish to give it, you can.

Applications are listed approximately in alphabetical order within each grouping (except when two apps are described jointly.) Most of the services covered here are either free or have a free component or trial.

Lending, Borrowing This group of applications refers to those in which money actually changes hands electronically, either as part of a loan or as some form of payment (but not as part of an investment). Mobile applications have been left out, as the term web 2.0 hasn't yet been widely extended to smart phones and PDAs.

1. Prosper
   
   Prosper offers social networks for peer-to-peer community loans and financing. A group leader can create a new group and invite people to become members. An individual can register as a borrower and loan prospects can build a profile for themselves. Loans from a lender can be distributed to a single person or divided amongst several borrowers. A borrower's loan might come from a single lender or several, to reduce risk, and borrowers can choose from whom they select loans, based on the interest rates offered.


2. Zopa
   
   Zopa is a lot like Prosper. It serves as a potential alternative to expensive short-term loan rates, ideal for managing some of your consumer debt. Zopa does differ slightly from Prosper in some regards however. Zopa has nuances in the way loans are qualified and applied. Also note that Zopa is currently an UK-based system, however, they are "coming to the United States".

Personal Finance, Money Management, Expense Sharing

These applications deal specifically with tracking your personal finances and expenditures, paying bills, etc.

3. DimeWise
   
   DimeWise lets you define multiple accounts (savings, checking) and enter and track your transactions, including future expenses. Each expense can have a category tag as well as a note. Expenses can be exported or imported (OFX format, aka Microsoft Money 2002+, Quicken 2004+), set as recurring (daily, weekly, monthly, yearly), and even plotted as a chart to help you determine where your money is going. They have a 30-day free trial.


4. Foonance
   
   Foonance bills itself as a flexible way for individuals, couples and families to manage their personal finances. You can track your net worth over what they call "money stores", import your bank statements, "transfer" amounts between stores, "schedule" transactions and categorize them, and view pending transactions and money store balances. There don't appear to be any report capabilities, unlike DimeWise.


5. iOWEYOU
   
   iOWEYOU is described as an expenses sharing calculator that roommates or friends can used to keep track of who owes what. The service is free for groups of up to five people. While no money changes hands, it might be great for that insane roommate of yours who calculates rent to the fourth decimal, based on an actual square footage ratio of your room compared to the entire place... Uh, you know what I mean.


6. NetworthIQ
   
   NetworthIQ is the recipient of an SEOmoz.orgWeb 2.0 Awards Honorable Mention in "Business, Money, and eCommerce" and was declared #6 in the Top 10 Innovative Web 2.0 Applications of 2005. It's a free personal finance manager that allows you to monitor your net worth, debts, assets, etc. You can share your net worth publicly with other members, and view theirs as well. No private contact information is displayed, though a few PF (personal finance) bloggers do have a link to their website.


7. Wesabe
   
   Wesabe is a web-based personal finance tool where you can manage your finances. They've also added acommunity component where you can share your experiences with money, your saving tips, and your personal money goals. [While Wesabe isn't the only place to share goals, it seems that what was once taboo (publicly declaring your worth and your goals) is now encouraged.] Wesabe actually interacts with your bank accounts, so it's more than just a tracking tool. There are a few tiers of membership, including "free", as well as a free promo on Pro accounts through 2007. This appears to be amongst the most robust of the "personal finance management" tools being offered online at present, and there are many more features than what's covered here.

Stock Market, Investing, Tracking, Portfolio Management

These applications are specifically for tracking stocks and discussing with community members, managing a portfolio, and conducting actual trades.

8. BullPoo
   
   The name BullPoo itself is enough to warrant a look at this investment community where you can "share and collaborate on investment information." It has a rich interface, but possibly a bit intimidating, where you can organize your portfolio, store trade history, set an avatar, write or read blogs on whatever stock, make forecasts on a stock to see how you compare to other members, and loads more. For someone with the investment bug that wants to be part of a community, this site could be a positive "timewaster".


9. CAPS (Motley Fool)
   
   The Motley Fool's CAPS application is similar in nature, if not appearance, to BullPoo. At least from a superficial view. It's not so much about tracking your investments as participating in a community and predicting or viewing predictions of stock outcomes. There's a lot here to be absorbed, but it seems like quite a diversion from regular Motley Fool financial advice in that it seems almost frivolous.


10. DigStock
    
    DigStock is a Digg-like list of stock market + investing articles. Members submit a synopsis of an article from elsewhere (with the URL) and other members vote for the stories they like. Each story, instead of being tagged with a topic category, is tagged with the appropriate stock ticker symbols. The assumption is that because the article ranking is community-based, active members will help define what type of stories are desirable. And of course, there's the obligatory stock charts.


11. FeelingBullish
    
    FeelingBullish is very similar to CAPS in functionality, and also follows a community model of sharing and communicating with other investors.


12. GStock
    
    GStock is "a virtual supercomputer" for stock market analysis. It runs on a grid computing model and claims to test over one billion investment strategies per stock. Then it emails you BUY/ SELL (B/S) alerts for major US-traded stocks in your portfolio. They also claim that 70% of trades based on their BUY/SELL alerts make profits. Navigation, though, is extremely sparse. Enter a stock ticker symbol in the search field to get a chart with B/S indicators. Then apply common sense as to whether you should take the action offered, based on your price for that stock.


13. MoneyTwins
    
    MoneyTwins is not Forex (foreign exchange) trading per se, but rather, if you have foreign currency and want to exchange it with someone for other currency, you can do so with community members instead of a bank - thus reducing commission costs.


14. SaneBull
    
    SaneBull is customizable web interface with movable components that let you track specific stocks by symbol and market, as well as browse news feeds from several financial websites. It uses a number of web 2.0 technologies including AJAX.


15. StockTickr
    
    StockTickr is another social investing application. You can watch animated stock tickers change in real-time, or subscribe to the RSS web feed. Trades are categorized by popular, profit, long, short, open, closed, and alerts. Though what you are watching is based on the portfolios of members. That is, all watchlists are shared amongst the StockTickr community.


16. Wikinancial
    
    Wikinancial is a financial community where watchlists are shared, as are discussions in the forum — each stock has its own. In addition to the obligatory market and stock charts, there's also an archive of articles, presumably written by members. They have something called the "chat" box, though it's not an integrated IM (Instant Messaging) client, merely a form for starting a new discussion thread. Though provision for real-time chatting, text or voice, might add another dimension to the community, provided some controls such as group moderation were implemented.


17. Zecco
    
    Zecco combines two popular features — a financial community and free online investment trading. That's right, free, as in no commissions and no hidden fees. This bold move garnered them thousands of new accounts on launch day, an event that was covered by CNBC TV. To actually trade, you have to provide banking information, employment information, and a government ID, all of which have to be faxed after account confirmation.

Real Estate

These applications help you to find, sell or just manage your real estate properties.

18. Homethinking
    
    Homethinking is a real estate application with a difference. They take an Amazon/ eBay approach in that you can find agents and see "reviews" of that agent, as well a list and a map of what properties they are handling at present. Details of how many properties they have sold are also provided, including location, house details, and asking and final prices. A random query for Atlanta showed a list of agents for whom no reviews were present. However, Homethinking claims over 1.5 million listed agents and nearly 2.5 million transactions.


19. iiProperty
    
    Have real estate in your investment portfolio? iiProperty offers numerous features to help you manage your properties online: advertise properties for sale or rent (allows pictures), send notices to tenants or rent invoices, track rents and leases, view status indicators and alerts, manage income and expenses. iiProperty is a fairly comprehensive package with 5 price points, including Lite (free), which lets you advertise properties, post to Craigslist, and track online ads, leases, tenant records, rent due + received, and more.


20. Rentometer
    
    Need to get away from your insane roomate who calculates rent to mad decimal places? Use Rentometer, which is part of iiProperty. It lets landlords determine if they are not charging enough rent for their area, and tenants can find out if they are being charged too much. A random test for a $1000/m studio apartment in Sandy Springs (Atlanta), Georgia showed that, just down the street, there's an similar unit for only $525. Move, and you can put the savings into stocks, or loan it out on Prosper.


21. Trulia
    
    Trulia is a real estate search engine for the United States that gives you the option of specifying price range, property type, # of bedrooms and bathrooms, and square footage. You can specify region by city or zip code, and a search produces not only a list of properties and a link to the appropriate seller, but a Google map of the region with icons marking each. They also offer interactive heat maps which show price trends. So if you are interested in investing in one or more properties, Trulia gives you a birds eye view of what's available that fits your criteria.


22. Zillow
    
    Zillow has a database of millions of residential properties that buyers can browse, along with maps, estimates of a property compared against nearby properties, advice on loans, and a loan calculator. Sellers can get an estimate of their home and keep it private or make public. They can also compare profiles of nearby properties. Current homeowners who are neither buying nor selling can get an estimate of their home and compare it to other properties.

Miscellaneous

These are applications that have a web 2.0-ish aspect to them but do not fall into any of the above categories.

23. cFares
    
    cFares lets you specify desired trip details such as from/to locations, departing/returning dates, time of day (morning, noon, afternoon, etc.), and ticket class (economy, business, first class), and finds you the lowest airfare in their database. They'll also check nearby airports around your from/to locations, to provide alternates. For example, a trip from Boston to Atlanta on Dec 13, returning Dec 20, economy class returned Delta and American Airlines flights ranging from $149 to $199, plus taxes in some cases. While searching is free, these rates are only available to cFares members. Membership allows you to purchase a ticket online.


24. MedBill Manager
    
    MedBillManager, as the name suggests, lets you manage all your medical records (providers, bills, etc.) online, track payments owed to you, and track medical expenses for easy reporting to the government, insurers, and employers. You can compare your medical costs against that of other members. While MedBillManager is a fairly robust, complex application, they've done a nice job with the explanation page and the sample screens, so it's easy to see the scope of the application.


25. PayScale
    
    Want to know whether what you are earning for your job compares to others? Need to know if you are paying an employee fairly? PayScale has a database that spans numerous countries and breaks them down into regions (states, provinces). An interesting thing about PayScale is that it appears to build its database from members. Not exactly accurate if there's false data being entered, but over time, the information will probably become more accurate. They offer you a free salary report as an incentive to fill out your details. In addition, they also have resources (links, articles, etc.) for job seekers.

Additional Sources

Additional (general) sources used for the items above include:

• Emily Chang's eHub.
• SEOMoz Web 2.0 Awards.
• Ajaxian.
• TechCrunch.
• Mashable.
• Lifehack.
• Lifehacker.
  

� yourcreditadvisor.com

A Primer on Homeowner Tax Breaks

Thinking about purchasing your first home? Then you're probably well aware of the potential tax breaks coming your way.

In case you're not, let's review. While the cost of renting is generally a nondeductible expense (except for when part of the home is used for business purposes), homeowners can claim an itemized deduction for interest on up to $1 million worth of mortgage debt used to acquire or improve their principal residence. Ditto for interest on up to $100,000 of home-equity debt secured by their principal residence. Real-estate property taxes can be claimed as an itemized deduction, too. You also can generally deduct any points you paid (or the seller paid on your behalf) to take out the mortgage.

But you probably knew all that, right? Now for the tax-law catches your realtor probably never told you about. Don't worry: What's detailed below probably won't have you running back into the arms of your landlord. But it just might give you a more realistic expectation of how homeownership will affect your future tax bills.

The Standard-Deduction Factor
The first thing to understand is that your actual tax breaks from home ownership may be less than expected if you were claiming the standard deduction before you bought. Why? Because the standard deduction is a tax-law freebie. You don't need to have any personal deductions whatsoever to claim it. For 2007, the standard deduction amounts are $10,700 for joint filers, $5,350 for singles, and $7,850 for heads of households.

When your itemized deductions are less than the standard deduction, you simply forgo itemizing and claim the standard allowance instead. Many folks are in this situation until home ownership triggers deductions for mortgage interest and property taxes. Those write-offs — when added to other itemized deductions for state and local income taxes, personal property taxes, and charitable donations — are usually enough to exceed the standard-deduction amount.

The question is: How much of a tax break did you really reap from your home ownership write-offs? For example, say you're married and would have claimed the joint standard deduction of $10,700. Then you buy a house and pay $12,000 a year for mortgage interest and $2,500 for property taxes. On first blush, you might think you've just lowered your taxable income by a whopping $14,500 ($12,000 + $2,500). Not so fast! Assume you also pay state income taxes of $2,000 and contribute $500 to charities. So your total itemized deductions add up to $17,000 ($12,000 + $2,500 + $2,000 + 500). That's only $6,300 above the standard deduction you would have claimed in the absence of buying a home. So you really netted only $6,300 in additional write-offs vs. the $14,500 you might have expected.

Now, if you were already itemizing before you bought or were very close to doing so, your additional deductions from mortgage interest and property taxes will reduce your taxable income dollar for dollar (or nearly so). The point is: Be sure to consider the standard-deduction factor when calculating your anticipated tax savings. That way, you won't be shocked by an unforeseen tax bill next April.

The High-Income Phaseout Factor
If you're a high earner, you're less likely to be affected by the standard-deduction factor. Why? Because you probably have enough itemized deductions (from state and local taxes and charitable contributions) to exceed the standard-deduction amount even without any write-offs for home-mortgage interest and real-estate property taxes. Instead, you may have to worry about the dreaded deduction-phaseout rule that afflicts high-income types.

Once your 2007 adjusted gross income (AGI) exceeds $156,400 (regardless of whether you file joint or single taxes), the phaseout rule reduces your itemized deductions by 2% of the excess. For instance, say your AGI is $300,000. Your otherwise allowable itemized deductions are reduced by $2,872 [($300,000 - $156,400) x .02]. If your AGI is $500,000, your otherwise allowable itemized deductions are reduced by $6,872 [($500,000 - $156,400) x .02]. You get the idea. Not all itemized deductions are affected by this nasty rule, but mortgage interest and real-estate property taxes are. The law provides that taxpayers can't lose more than 53.33% of their deductions under this rule, but that's small comfort to its victims. In fact, itemized deductions for some high earners are curtailed to the extent they wind up back in the standard-deduction mode. When that happens, they don't receive any actual tax benefit from their mortgage interest and property-tax expenses.

Bottom line: If you expect your AGI to exceed $156,400, you'll need to whip out the calculator to figure your actual home-ownership tax savings.

The Home-Equity-Loan Factor
Once you're ensconced in your new home, you may decide to take out a home-equity loan. As mentioned above, you can generally claim an itemized deduction for interest on up to $100,000 worth of home-equity debt. The key word here is generally. The fact is, you can't deduct interest to the extent the home-equity-loan principal plus your first mortgage principal exceeds the value of your home. For example, say your first mortgage is $200,000 and your home-equity loan is $75,000. If your home is worth $250,000, you can deduct interest only on $50,000 worth of home-equity-loan principal. Interest on the remaining $25,000 falls into the nondeductible personal-interest category.

A more likely cause for concern is another rule that disallows any alternative minimum tax, or AMT, deduction for home-equity-loan interest unless the loan proceeds were used to improve your property. For example, say you take out a $50,000 home-equity loan and use the money to pay off a car loan and some credit-card balances. For regular tax purposes, that's fine. You can deduct the home-equity-loan interest on Schedule A, along with the interest on your first mortgage. However, if you're in the AMT mode, you can't deduct any of the home-equity-loan interest in calculating your AMT bill.

On the other hand, if you spend your $50,000 home-equity-loan proceeds on a new pool and covered patio, you're good to go for both regular tax and AMT purposes. And one more thing: The high-income deduction-phaseout rule explained earlier can also whittle down your otherwise allowable home-equity-loan interest deduction.

Home Sweet Home
Now you know all the home-ownership tax angles your realtor was afraid to reveal. Still, buying a home usually works out to be at least a decent proposition taxwise. And it will be much better than decent if you eventually sell for a big tax-free gain down the road. If you're married, you can potentially rake in a federal income-tax free profit of up to $500,000, or $250,000 if you're unhitched. Now that's a sweet deal!

By Bill Bischoff

My Kids Are Worth How Much?

Most parents wouldn't trade the experience of raising children for anything in the world.

If only it weren't so darn expensive. Between the medical bills, child care and college tuition, it's a wonder parenting hasn't gone the way of the wet nurse. Fortunately, the government offers some generous tax breaks to help ease the financial burden. It's up to taxpayers, of course, to take full advantage of them — and in some cases this can be difficult, since it may involve figuring out which breaks are more beneficial than others.

There are a few things parents should understand. First, most child-related deductions and credits are available whether families take the standard deduction or itemize their taxes, says Martin Nissenbaum, national director of retirement planning and taxation with Ernst & Young. Second, there's a difference between deductions and the more coveted tax credits. Don't confuse the two. A deduction, such as the tuition and fees deduction, merely decreases taxable income. A tax credit, such as the child-tax credit, allows taxpayers to subtract the amount dollar for dollar from their tax bill, or add the amount to their refund.

The most generous tax breaks come with income limits. The tax credits in particular are geared more for middle- and lower-income families. If you don't qualify for a credit or deduction, you can still save money by setting aside pretax dollars in flexible-spending accounts for medical and child-care expenses. If your employer doesn't offer these, you may qualify for one of the new health-care spending accounts. While these can't compare with tax credits, they will help cover some essential parenting costs.

Here's a brief summary of the most common tax breaks available for parents. Some of the rules can be complicated, to say the least; when in doubt, consult a tax adviser.

Deductions
Exemptions. Let's start with the basics. Every member of a household potentially counts toward a tax-deductible exemption on the family tax return. In 2007, each exemption is worth a $3,400 deduction. So a married couple with two kids qualifies for four exemptions, or a $13,600 tax deduction.

What many people don't realize is that even exemptions have income limits, warns Jackie Perlman, a senior tax research analyst with H&R Block. For 2007, the tax exemptions for married couples filing together start to phase out at adjusted gross incomes (AGI) of $234,600, $117,300 for married filing separately, and for heads of households, $195,500.

Tuition and fees. Helping a child pay for college? Uncle Sam will cut you some slack. In 2007, parents can deduct up to $4,000 in tuition expenses, provided their modified AGI doesn't exceed $130,000 for married couples or $65,000 for single parents. That deduction gets cut in half to $2,000 for married couples making between $130,001 and $160,000, and for single parents earning between $65,001 and $80,000. The deduction is wiped out entirely for those with higher modified AGIs. Parents should also note that the college tuition and fees deduction can't be used in conjunction with any other education credits, such as the Hope Scholarship or Lifetime Learning credits, which we will discuss later. Also, this tax break won't be around for 2007 and beyond unless Congress extends it (which is likely).

Student-loan interest. Even if parents set aside money for their child's college tuition, chances are they'll still need to borrow money. Thankfully, a portion of qualifying student-loan interest (loans from family, for example, don't count) is also tax deductible. The IRS allows parents to write off up to a maximum of $2,500 in loan interest. For 2007, this deduction phases out for married filers with modified AGIs between $110,001 and $140,000 and for single filers between $55,001 and $70,000. The only rule here is that students must be enrolled at least part time in a degree program to qualify. For more on student loans, see our story.

Tax Credits
Child-tax credit. In a parent's eye, a child is priceless. Uncle Sam puts the figure at $1,000, in the form of a tax credit. And unlike some other credits and deductions, the government doesn't limit how many children qualify. So if you have four little darlings under the age of 17, expect to get $4,000 swiped off your tax bill.

Like most credits, this one also has income restrictions, but they vary depending on how many children parents are claiming. The child-tax credit starts to phase out at modified AGIs that exceed $110,000 for married couples filing together, $55,000 for married filing separately and $75,000 for single parents.

Child and dependent care credit. Two-income households with children under 13 years old qualify for a dependent-care credit to help cover child-care expenses. The IRS allows working parents and those looking for a job (students and disabled parents also qualify) a credit of 20% to 35% on expenses up to $3,000 in child care for one kid and $6,000 for two or more kids. This translates into a maximum credit of $1,050 for one child and $2,100 for two or more kids.

The credit for parents earning more than $43,000 shrinks to just $600 for one child and $1,200 for two or more kids. Bernard Kent, a partner with PricewaterhouseCooper, recommends higher-income taxpayers set aside pretax dollars in an employer's flexible spending account instead. We'll talk more about these later.

Hope Scholarship credit. As we mentioned earlier, there are two education credits. The Hope Scholarship credit is for parents who are helping a child pay for college, and is worth up to $1,650 in 2007. To qualify, the young coed must be at least a part-time student in his or her first two years of secondary education. (This credit can be used only twice for each student, but there is no limit on the number of children who can qualify in any given year.) The income restrictions are a bit tighter than with the tuition and fees deduction. For 2007, this credit phases out for married filers with modified AGIs between $94,001 and $114,000, and $47,001 and $57,000 for single parents.

Lifetime Learning credit. The Lifetime Learning credit is far less restrictive than the Hope Scholarship credit. It covers students in their junior and senior years, and any other family members taking classes to improve their job skills. Here's the hitch: It can be claimed only once on any given tax return. Some families, however, will be able to claim the Hope Scholarship credit for one student and the Lifetime Learning credit for another. The latter is worth up to a 20% credit on tuition and other expenses of $10,000 or a maximum of $2,000. The income restrictions for the Lifetime Learning credit are the same as those for the Hope Scholarship credit.

Adoption credit. No one said adopting a child would be easy or inexpensive. There's the waiting game, the agency interviews and the lawyer fees. To help ease the process, in 2007 the IRS allows new parents an adoption credit worth up to $11,390. And if parents adopt a special-needs child, they can take the full credit even if their expenses totaled less than the value of the credit, says Ernst & Young's Nissenbaum. (In 2007, the credit starts to phase out when one's modified AGI exceeded $170,820.)

Cafeteria Plans
Medical costs. Whenever possible, take advantage of an employer's cafeteria plan, also known as a flexible spending account, to help pay for medical expenses. These allow employees to use pretax dollars to cover all out-of-pocket medical costs not reimbursed by a health plan. There are no income limitations. Most employers, however, limit contributions to $4,000.

Child care. As we mentioned earlier, parents earning more than $43,000 are better off signing up for an employer's dependent-care spending account. Just like the medical accounts, these plans allow taxpayers to set aside pretax dollars for child-care expenses. The IRS limit is $5,000.

The only danger with flexible spending accounts is that any money that isn't used is lost. So budget accurately. And don't forget to save those child-care receipts. Your employer probably won't allow you to simply fill out a form stating that tuition at your local daycare center is $5,000.

Divorce
Finally, you may have noticed that we haven't discussed ways divorced parents can divvy up all these tax deductions and credits. As a rule of thumb, the parent with custody for the greater part of the year gets to claim them. Of course, sometimes parents share custody, and this can get a little complicated. Whenever possible, try to work these things out early and have them noted in the divorce agreement, suggests H&R Block's Perlman. This will save everyone one less headache come April.

By Stacey L. Bradford

New Education Strategies

A tax change from 2006 potentially exposes investment income earned by your under-age-18 dependent child to the dreaded Kiddie Tax. Before 2006, the Kiddie Tax1 only affected the under-14 crowd. Why should you care? Because the Kiddie Tax rules can cause part (maybe most) of your child's investment income to be taxed at higher federal rates (possibly as high as 35%). Not good!

The unfavorable Kiddie Tax change wipes out two time-honored college-savings strategies. However, you can still save for college in at least three tax-smart ways. So life continues to be good as long as you keep your wits about you. Here's what you need to know.


Custodial Accounts and Crummey Trusts No Longer Work for College Savers

The new age-18 threshold for escaping the Kiddie Tax can greatly reduce or even eliminate expected federal income tax savings from setting up a Crummey Trust or an UGMA or UTMA custodial account to hold and invest funds intended to finance your child's future college costs.

For example, say you set up a Crummey Trust or a custodial account for your college-bound child a few years ago. You then gifted money to the trust or account and arranged for the funds to be invested. Since Crummey Trusts and custodial accounts are considered legally owned by your child, any gains or income from the investments are taxed to the child. To the extent the Kiddie Tax rules apply, however, the gains or income are taxed at your higher marginal federal rate. Not good!

Before 2006, it was pretty easy to dodge the Kiddie Tax problem by having the Crummey Trust or custodial account invest in growth stocks, tax-efficient stock mutual funds, and tax-deferred Series EE U.S. Savings Bonds. By hanging onto these investments until the year during which the child reached the Kiddie-Tax-free age of 14 (or a later year), the gains and accumulated interest income were generally taxed at rates paid by an unmarried taxpayer. This typically translated into a federal income tax rate of only 10% or 15% on interest income and only 5% on long-term gains. Sweet!

Sadly, the age-18 Kiddie Tax rule eliminates the advantage of following this "buy-and-hold" strategy — unless the investments can be held until at least the year during which your child turns 18. This is no problem for Series EE Savings Bonds, because they have no investment risk. But it's generally a bad idea for equity investments. You probably don't want to be forced into holding onto these more-volatile issues until right before your child's college bills start coming due.

If the Kiddie Tax problem isn't reason enough to give the cold shoulder to Crummey Trusts and custodial accounts, there's more. Funds in a custodial account will fall under your child's legal control after he or she reaches the state-law age of majority (usually 18 or 21, depending on where you live). Somewhat similarly, funds in a Crummey Trust will eventually have to be dished out to the child under terms that were established when you set up the trust. In other words, once you've contributed money to a child's Crummey Trust or custodial account, you can't get it back. It must be used for the benefit of that child.

Bottom Line: Please take my advice and forget all about establishing a Crummey Trust or an UGMA or UTMA custodial account as a college-savings vehicle. Before 2006, they had tax advantages that made them worth considering. Not anymore.


The Good News: These Three Strategies Still Work Just Fine!

While the Kiddie Tax age-18 rule makes Crummey Trusts and custodial accounts unworthy as tax-smart college-savings vehicles, you still have other attractive choices. Here are the top three, in order of how well I think they work.

Tax-Smart Option No. 1: Contribute to a 529 College Savings Account
Section 529 college-savings accounts have a great big tax advantage. Briefly, these state-sponsored programs are allowed to accumulate income and gains free of any federal-income-tax hit. When the account beneficiary (your child) begins his or her college career, federal-income-tax-free withdrawals can be taken out of the account to cover qualified education costs. Most, if not all, Section 529 plans now accept contributions of over $250,000. So you can fund the entire cost of an expensive education with a Section 529 account. Better yet, there are no income restrictions. These tax-smart college savings vehicles are available even to the "rich."

When funneling gobs of cash into an account intended for a your child's college costs, I think you should be quite concerned about what will happen to your dough if things don't go as expected. After all, your kid could decide to focus on body surfing instead of higher education. Happily, a Section 529 account gives you admirable flexibility to deal with such things. Specifically...

• You're allowed to change the account beneficiary without any adverse federal-tax consequences — provided the new beneficiary is a member of the original beneficiary's family and in the same generation or an older generation. So you effectively can take money out of a Section 529 account established for one child and move it into an account set up for another child, or even into an account set up for yourself without running up a bill with the IRS.
• Should you need to get the Section 529 account balance back into your own hands, that's permitted, too. You can pull back all or part of the money. However, you'll owe federal income tax, plus a 10% penalty on any withdrawn earnings. No tax or penalty is due on withdrawn contributions. That's a reasonable price to pay for being allowed to recover the money.

Warning: The preceding explanation describes what the federal tax law allows. Most Section 529 college-savings plans conform to these guidelines, but they are not required to do so. Make sure any plan you're considering does conform before making any contributions. For more information on Section 529 college savings plans, including state-by-state comparisons, I strongly recommend visiting savingforcollege.com2.

Tax-Smart Option No. 2: Contribute to a Coverdell Education Savings Account
Provided your modified adjusted gross income (MAGI) isn't too high, you can make annual contributions of up to $2,000 to a Coverdell Education Savings Account (CESA) set up for a child under 18. What's a CESA? It's an account set up by a "responsible person," which means you, to function exclusively as an education-savings vehicle for the "designated account beneficiary," which means your child. If you have several children, you can contribute up to $2,000 annually to separate CESAs set up for each one.

While CESA contributions are nondeductible, the account's income and gains are permitted to grow free of federal income tax. Then, federal-income-tax-free withdrawals can be taken out later to pay for your child's college tuition, fees, books, supplies, and room and board.

There's one big catch: Your right to make CESA contributions is phased out (gradually eliminated) between MAGI of $95,000 and $110,000 if you're unmarried or use married-filing-separate status. If you're a married joint filer, the phase-out range is between MAGI of $190,000 and $220,000. Fortunately, it's often pretty easy to work around this restriction. Here's how: If your MAGI precludes contributions, you can recruit another individual who has MAGI below the magic number to act as the "responsible person." Then that person can set up and make contributions to your child's CESA. For example, you may be able to enlist your parent to be the responsible person for your child's CESA. If so, you can simply give your parent the money each year to make the desired annual contributions to your child's account.

Now for a few more ground rules. CESA contributions are prohibited after the account beneficiary (your child) reaches age 18. If the CESA still has a balance after your kid hits turns 30, the account must be liquidated and all the money distributed to him or her within 30 days. But there's often a better solution. The "responsible person" (presumably you) can roll over the account balance tax-free into another CESA set up for a new beneficiary who is under age 30 and a member of the original beneficiary's family, like one of your other children.

The rollover privilege effectively allows you to use CESA funds for another beneficiary's education costs if the original beneficiary doesn't attend college or turns out to not need the money (perhaps because of scholarships). However, once you plow contributions into a CESA, you can't get the money back for yourself. Also, you lose all control over the account if you have to recruit someone else to be the responsible person. These two negative considerations don't apply to Section 529 accounts, which give us two more reasons to like them better.

Tax-Smart Option No. 3: Save With Your Own Taxable Brokerage Firm Account
You can keep things really simple by saving and investing for your child's college costs in your very own taxable brokerage-firm account. The maximum federal-income-tax rate on long-term capital gains and qualified dividends is locked in at only 15% between now and the end of 2010. This is a pretty good deal.

What if you still have some appreciated shares in the college account when your child hits college age? Consider giving some to the child. He or she can sell the shares, pay the capital gains tax hit at a lower rate (probably only 5% or less), and use the money for college. If your college account has some shares that have dipped below cost, you can sell them and claim the resulting capital losses on Schedule D of your Form 1040. Then use the cash to pay for college.

The Bottom Line
While the age-18 Kiddie Tax rule shuts some college savings doors, others remain wide open. The three options explained here are your best tax-smart choices in the current environment. Please take advantage.

Links in this article:
1 smartmoney.com/taxmatters/index.cfm?story=20060711
2 savingforcollege.com

By Bill Bischoff

The Kiddie Tax

Finally setting up a college savings fund for your little one, huh? Then you've got to decide whether to put the account in her name, or in yours. And before you make that decision, you'll need to know the lowdown on the "kiddie" tax.

This meddlesome tax (but which ones aren't, right?) was established in 1986 to catch rich parents who were trying to circumvent taxes on their investments by putting the investment assets in the names of their little children. The tax applies only to children under the age of 14 as of Dec. 31 of the year in question. (After that, a child is taxed just like an adult.)

The kiddie tax rules allow a child under 14 to receive $750 in 2003 in investment income (from interest, dividends or capital gains) free of tax. The next $750 is taxed at the child's rate — presumably 10% or 15% for income and short-term capital gains, and 10% for long-term capital gains. Anything after that is taxed at the parents' rates, which can be as high as 38.6% for 2003. That means that $504 is the most you can save in 2003 taxes when the kiddie tax applies to your child's investment income.

Here's what you give up for that savings. First, you lose control of the money once your child turns age 18 or 21, depending on your state. "If your kid decides he wants to skip college and ride a Harley around Europe for a year, he can take that money and go," warns Joan Chasen, a Framingham, Mass.-based fee-only financial planner. Second, you may be reducing your child's chances of getting financial aid. Here's why: Colleges will expect a child to contribute 35% of the assets in his or her own name to cover college expenses while parents are expected to contribute only 5.6% of theirs.

But for some parents there is a big tax advantage that may balance the drawbacks listed above: If you are bumping up against the threshold to qualify for Roth IRA and Education IRA accounts (now called Coverdell Education Savings Accounts), which are limited to certain adjusted gross incomes, you can increase your chances of qualifying by moving income to your children . "Every dollar you keep out of your adjusted income helps in terms of the myriad phaseouts in the tax code," explains David Foster, a fee-only financial planner in Cincinnati. "If you take $50,000 and put it in your kid's name, you may have removed $5,000 [of investment earnings] from your 1040 and kept AGI under $150,000." Thus, you would just meet the cutoff for opening a Roth.

Once you decide to put assets in your child's name, there are a couple ways to minimize your exposure to the kiddie tax. One is to buy tax-exempt bonds or series EE or Series I U.S. savings bonds, the interest of which isn't taxed until maturity or redemption. You can wait until the kids have grown out of the kiddie tax to cash them in, and avoid the issue altogether. Or, if the interest on bonds is less than $750 annually, you can report that income every year and pay nothing. Then, when the bonds mature, you'll pay no taxes on them. But these investments won't provide the kind of capital appreciation you probably want in a college-savings account.

If that's the case, go for stock or equity mutual funds instead. For example, you can minimize your tax bill by buying index funds, which sell stocks infrequently and thus generate few taxable gains. There are also funds specifically designed to minimize taxable gains and income by carefully selecting shares to sell so that capital losses offset capital gains or low-dividend stocks with the potential for lots of capital appreciation. You can then sell your child's stock or mutual fund shares after he or she is 14. At that point, the kiddie tax rules won't spoil the tax savings.

The 529

State-run college savings plans (aka 529 plans) are a great tool for parents. We tell you who should get a 529 and how to pick the right one.
For parents struggling to save for their children's college bills, tax breaks have been few and frustrating.
Custodial accounts? The tax savings are minimal, and you give up control of the assets to your kid. State-run prepaid tuition plans? They lock you into sub-par returns.
The Coverdell Education Savings Account (formerly known as the Education IRA) is a decent option, since all savings grow tax-deferred and withdrawals are tax-free. But you can put away only $2,000 a year, hardly enough to cover the rising cost of college.
Little wonder that most parents end up saving in taxable accounts -- thereby sacrificing a big piece of their profits to Uncle Sam -- or raiding their retirement accounts.
Enter the 529. These state college savings plans, named after the section of the tax code that governs them, are the more attractive siblings of prepaid tuition programs.
A state's prepaid plan allows you to pay now -- at today's tuition rates -- for school tomorrow. But 529s, now offered in most states, are far more flexible.
The money may be used at any school you choose and for all qualified higher education expenses, including room and board (not so with a pre-paid plan).
Most 529 savings plans offer a menu of age-based portfolios, and some also offer a small selection of stock and bond funds. In the former case, your annual contributions get invested in a pre-selected portfolio of stocks and bonds. Early on, the portfolio is tilted toward stocks, and as the time for college nears, the weighting shifts more heavily toward bonds. States contract out to investments companies, such as TIAA-CREF and Fidelity, to manage the portfolios.
You never have to worry about annual taxes on dividends and gains, and withdrawals are tax-free too (at least until 2010, when Congress has the option of extending the break). What's more, if you invest with your own state's 529, you may get state-tax deductions on contributions or exemptions on withdrawals (you may, however, choose to forego the state tax break if another state has a better 529).

Contribution limits are generous

Investment minimums are low (plans may let you sock away as little as $25 a month), and there is no restriction on how much you may contribute every year unless the account is nearing the lifetime cap.
Each state determines its own lifetime contribution limit, ranging between $100,000 and $270,000.
Just because you can contribute as much as you want, however, doesn't mean you should -- annual contributions of more than $11,000 ($22,000 if contributing with a spouse) are subject to the gift tax.
One caveat to the gift-tax limit: You may contribute as much as $55,000 tax-free in one year ($110,000 with your spouse), but that contribution will be treated as if it were being made in $11,000 installments over the next five years. In other words, you can't make such a large contribution every year without tax consequences.


Who should get one

So how do you know if a 529 is for you? Shortcomings and all, 529 plans are a hard-to-beat way to boost your college savings -- provided you meet one of these four criteria.
You're in an above-average federal tax bracket, with time to save. The critical advantage of 529 plans is tax-deferred compounding. The higher your tax bracket and the longer your time horizon, the greater the benefit of tax-sheltered compounding.
In theory, you could build a tax-efficient college savings portfolio without a 529: Simply buy and hold top-quality individual stocks or mutual funds that keep taxable distributions to a minimum. That way, you won't pay taxes until you need your money.
The problem, however, is that as your child nears college age, you should start shifting savings out of stocks and into lower-risk bonds and cash. All that asset shifting triggers tax bills -- something that doesn't happen with 529 plans. "The real-world advantage of investing tax-sheltered in a 529 beats the theoretical advantage of investing for low capital-gains taxes," notes Raleigh, N.C. financial adviser Brian Orol.
When you compare a 529 plan with a balanced fund that shifts between stocks and bonds, the tax advantages are obvious. According to TIAA-CREF, an investor in the 31 percent tax bracket who saves in a 529 plan for 18 years would come away with 20.5 percent more than someone who puts the same amount in the typical taxable balanced fund.

You are unlikely to qualify for need-based financial aid. As adviser Raymond Loewe of College Money, a planning firm in Marlton, N.J., puts it, "The tax savings you get in a 529 plan blow up when it comes time to qualify for aid."
Here's why. Under financial aid formulas, 529s are counted as the parents' asset until you withdraw the money. And parents' assets are assessed at the lowest possible rate for financial aid purposes. But gains from a 529 count as the student's income, up to 50 percent of which is considered available to pay tuition.
All this means is that anyone who might need a lot of aid is better off saving outside a 529.
What if your financial situation changes after you've begun funding a 529? If you later find yourself in a position where you are likely to be eligible for financial aid, try and wait to take withdrawals from your child's 529 until the last year of college, when it won't be counted against future financial aid.

You live in New York, Michigan or another high-tax state with significant 529 tax breaks. If your state offers a generous tax deduction on 529 contributions, take a serious look at the plan even if you are in a lower tax bracket. In New York, for example, residents earning more than $40,000 are taxed at a rate of 6.85 percent; if you live in New York City, add on 3.78 percent. The state's 529 plan, run by TIAA-CREF, offers a state-tax deduction on contributions of up to $10,000 per household a year (no matter the number of kids), which can save New York City residents as much as $2,038 a year.

You're a grandparent looking to reduce your estate. You can deposit up to $55,000 ($110,000 for a married couple) into a 529 plan without incurring the federal gift tax, making 529s an ideal way to move a big sum out of your estate quickly. A $55,000 contribution is counted against your $11,000 annual gift exclusion over five years, so you won't be able to make another tax-free gift to that beneficiary for six years.


How to pick the right plan

Which is the best 529 for you? No two programs are alike -- they differ dramatically in many ways, from investment choices to costs to tax breaks. Your first step should be to look at your own state's plan (if it has one). In some states you may qualify for a matching grant or scholarship. More important, many states give residents a tax deduction on 529 contributions and most exempt the earnings on withdrawals.
If your state taxes are high and your local plan offers generous tax benefits, you can stop reading here: You're best off staying at home. But if you live in a state with low or no taxes, or with limited tax breaks, then it's time to shop around. Use the following three rules as guidelines.

Shop for a manager, not a performer. Given the short track record of 529 plans, you can't glean much from the funds' performance history. So stick with plans run by investment companies with successful records managing retail mutual funds and pension plans, such as Vanguard, Fidelity, and TIAA-CREF.

Stick with low-cost plans. Expense ratios vary considerably, from less than 0.3 percent to more than 2 percent. Some states' plans are sold by brokers, which layers on additional costs. You could also pay other fees. Several states charge to open an account and tack on $25 or so in annual fees. The less you pay in fees, the more your contributions can work for you.

Look for the right investment choices, not the most. The typical 529 menu is still fairly limited. In most plans, the key offering is an age-based portfolio, which gradually shifts the asset allocation as your child ages. For children under three, for example, some 80 percent of the portfolio may be stashed in stocks. As your child grows, the equity portion shrinks so that by the time he or she is 18, the assets are held mainly in bonds or cash.

Increasingly, states are adding conventional stock and bond funds. But because you can't switch your money around freely the way you can in a 401(k), a vast number of choices isn't much of an advantage -- and is potentially riskier.
For most investors, the best choice is an age-based portfolio. In the past, these funds were criticized for being too heavily oriented toward fixed-income assets, even during the child's youngest years. But a conservative strategy is often a sensible one. "People forget that they usually have fewer years to save for college than for retirement -- most often 10 years or less, since they tend to start late," notes TIAA-CREF vice president Timothy Lane. "If you lose a lot in the early years, it's very hard to make it up."
You can also create your own stock and bond mix by opening more than one account in the child's name -- one for each asset class -- and controlling your own allocation by the amounts you invest in each. Another strategy: If you don't like the asset mix designed for your child's age, find out if you can use a portfolio for a different age. Some states let you pick your own starting point.

The most frequently asked 529 questions

Q. What's so great about 529 plans?
A. You never have to worry about annual taxes on dividends and gains, and withdrawals are tax-free too. What's more, if you invest with your own state's 529, you may get state-tax deductions on contributions or exemptions on withdrawals.

Q. Can anyone open a 529 account for any child?
A. Generally, you ("the account holder") can open an account on behalf of nearly any child ("the beneficiary"), regardless of your income. Grandparents, for example, can save on behalf of grandchildren. You can even put away money for someone who's not a family member. A handful of states open their plans only to state residents -- but most are available to everyone.

Q. Can two people open an account for the same child?
A. You can open more than one account in a single state for the same child, and more than one person can fund a 529 for the same beneficiary. No matter the number of accounts, the state's maximum contribution limit still applies to the beneficiary. States don't have to count balances in out-of-state accounts when determining whether you've met your limit, but some have started doing so.

Q. What if I need to tap the plan?
A. You can make a withdrawal anytime, but you'll pay taxes plus a penalty on the earnings -- usually 10 percent -- if the money is not used for higher education.

Q. Does my child have to go to a state school?
A. No. You can use the money at any accredited degree-granting school, whether it's private, public, undergraduate, or graduate.

Q. What kind of educational costs can the money be used for?
A. In all states, tuition qualifies. Most states also permit 529 money to be used for other costs, such as room, board, fees and books.

Q. What if my child doesn't go to college or has money left over?
A. You can take out the money, paying taxes and penalties. In most states, you can leave money in the plan indefinitely, in the hope that your child will eventually go to college. A third option is to name a new beneficiary on the account. If your child dies or becomes disabled, most states will waive penalties on withdrawals.

Q. Can I switch investment options?
A. Not without going through the rollover process described above. An easier alternative is to open another account for the same beneficiary and invest future contributions in a different fund.

Q. Can I also fund a Coverdell Education Savings Account?
A. Absolutely -- that restriction changed at the beginning of 2002. You can contribute up to $2,000 annually to a Coverdell, regardless of how much you contribute to a 529.

Student Loan Interest Deduction

Student Loan Interest Deduction

You may be able to deduct interest you pay on a qualified student loan. And, if your student loan is canceled, you may not have to include any amount in income.

The deduction is claimed as an adjustment to income so you do not need to itemize your deductions on Schedule A Form 1040.

You cannot claim the deduction if:

1. Another taxpayer claims an exemption for you as a dependent,
2. Your filing status is married filing separately, or
3. You are not legally obligated to make payments on the loan.

A qualified student loan is a loan you took out solely to pay qualified higher education expenses. The expenses must have been:

1. For you, your spouse, or a person who was your dependent when you took out the loan,
2. Paid or incurred within a reasonable time before or after you took out the loan, and
3. For education furnished during an academic period when the recipient was an eligible student.

Qualified higher education expenses are the costs of attending an eligible educational institution, including graduate school. The costs of attendance are determined by the eligible educational institution and include tuition and fees, an allowance for room and board, and an allowance for books, supplies, transportation and miscellaneous expenses.

Costs you incur have to be reduced by:

1. Non–taxable employer – provided educational assistance.
2. Non–taxable distributions from a Coverdell education savings account,
3. Non-taxable distributions from a qualified tuition program (QTP),
4. U.S. Savings Bond interest that is non–taxable because it is used to pay qualified higher education expenses,
5. The non-taxable part of scholarships and fellowships,
6. Veterans educational assistance, and
7. Any other non–taxable payments (other than gifts, bequests, or inheritances) received for educational expenses.

The student must have been enrolled in a degree, certificate, or other program leading to a recognized educational credential at an eligible educational institution and must have carried at least one half of a normal full–time work–load for the course of study being pursued.

The deduction will start to phase out when modified AGI exceeds certain amounts, please refer to Publication 970 for these limits.

If you paid $600 or more of interest on a qualified student loan during the year, you will receive a Form 1098-E (PDF), Student Loan Interest Statement, from the financial institution, from a governmental unit (or any of its subsidiary agencies), from educational institutions, or any other person to whom you had paid student loan interest of $600 or more in the course of their trade or business.

More information on student loan interest deduction and other education benefits is available in Publication 970, Tax Benefits for Education.

Tax definition

A tax (also known as a "duty") is a financial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (e.g. tribes, secessionist movements or revolutionary movements). Taxes could also be imposed by a subnational entity.

In English Slang - originating from the North of England - tax is a word that is sometimes used in reference to theft. In particular robbery mugging/street theft.

Taxes consist of direct tax or indirect tax, and may be paid in money or as corvée labor. In modern, capitalist taxation systems, taxes are levied in money, but in-kind and corvée taxation are characteristic of traditional or pre-capitalist states and their functional equivalents.

In English language nations, a government agency, such as Revenue Canada or the Internal Revenue Service in the United States or in the United Kingdom the Inland Revenue or commonly amalgamated as Her Majestys Revenue and Customs (HMRC) in the UK, collects taxes. When taxes are not paid to a government's satisfaction, civil penalties such as fines or forfeiture are carried out against the non-paying entity or individual. In most modern industrialized countries, when an individual fails to pay his government the taxes, it will ultimately result in fines, and in some cases imprisonment.

The means of taxation, and the uses to which the funds raised through taxation should be put, are a matter of hot dispute in politics and economics, so discussions of taxation are frequently tendentious.